Correlation Study Of Auditor Reputation And IPO Underpricing

IPO， which is short for initial public offerings,is a stock issuing that acompany,incorporated or limited liability,raising capital by offering stocks to the public forthe first time.IPO underpricing refers to the phenomenon that on the first trading day,theclosing price is higher than the issuing price,producing a rate of return over the initial onthe capital market.The phenomenon of IPO’s underpricing exists vastly in every stockmarket in all countries.Considering the researches on the west,there are several maintheories to explain IPO’s underpricing,such as asymmetric information theory（"winner’scurse"theory, the transmission of information theory, agency theory, agency reputationhypothesis）; system theoretical reasons （to avoid litigation hypothesis, internal shareslocked hypothesis）;ownership and control theory;behavioral approach theory（superimposition of information theory, investor sentiment, prospect theory and mentalaccounts） and so on. But these theories do not necessarily apply to China’s specialmarket environment, so we need to use China’s empirical data to re-authenticate.Among the many theories,the agency’s reputation hypothesis is more convincing.CPA is an important intermediary on China’s securities market and an important guaranteefor the credibility of published information by an enterprise,acting as a"informationproducers" and "information transfer intermediary" in the IPO process.The issuance risksof new shares audited by accounting firm with high reputations are lower than the onesaudited by ordinary accounting firms,so as to the accuracy,thus their degrees ofunderpricing are lower too.Investor sentiment is one of the important factors too.Assumingthat the issuers and underwriters are rational,and the investors are limited rational,theissuers must make simultaneous case of high IPO price and high underpricing in order totake advantage of investors’ optimism and maximize the issuers’ income.At this point theissuers’guidance as well as investors their own bounded rationality may lead to thesituation that investors are so overconfidence that they neglect the external information（such as firm reputation）, finally bring about high rate of IPO underpricing.Asaccounting firms and investors are important participants in the securities market,therefor,my study on the relations with auditor reputation、investor sentiment andIPO underpricing has a important significance on hiring auditors、helping investors toinvest rationally and regulating the securities market environment of China.In this paper,I use971IPO companies in A-share market as my empirical studysubject.My study starts from auditors reputation and investors sentiment the twoperspectives.And then I divided the sample into two groups with investors sentiment toresearch the correlationship of auditors reputation and the IPO underpricing.In the progressof IPO,the leval of investor sentiment may cause the differance in the impact of auditorsreputation to the leval of IPO underpricing.The results showed that,in the process of issuing new shares, the auditor reputation andIPO underpricing levels were significantly negatively correlated.This shows that the agencys’reputation theory can be reflected in the Chinese stock market to some extent and issuingcompany will choose the accounting firm with high reputation to deliver the signal of the valueof the company to investors, investor can speculate the actual value of IPO shares based on theinformation the accounting firm provides. Because of it we can know that accounting firm ofhigh reputation will reduce IPO underpricing rate.Taking the level of investor sentiment intoaccount,it is likely to make auditors reputation’s impact on IPO underpricing level differ.Afterdividing investor sentiment into groups of high and low emotional mood group according tomedian of PE and turnover rate, the regression results show that, compared with the group ofhigh emotional,auditors reputation impact more significant on IPO underpricing in the lowemotional group.This is because when investors sentiment upsurges, investors will be over-confident, which will make them tend to ignore the investment details. And when investorsentiment is low, investors are more sensitive to external information and more inclined toinvest in a company with high intermediary reputation,making the accounting firm ’sreputation inthis period had a significant effect on the IPO underpricing.Based on these conclusions, the paper considers the stock market environment to beimproved from the following aspects.Firstly,to strengthen the establishment of themechanism of the auditor reputation; Secondly,focus on investors’ education and regulatetheir behavior;Thirdly,improve corporates’governance and strengthen the construction ofthe system of securities market.