An Empirical Analysis Of IPO Underpricing In China 's A - Share Market

IPO underpricing refers to abnormal returns that gain from the significant difference between closing price of first trading day of IPO issurer and its pre-set issue price. Since the1970s, the academia has conducted a lot of theoretical and empirical research. The average worldwide abnormal return of IPO is around30%.Emerging market’s IPO abnormal return is significantly higher than that of developed countries. China’s IPO abnormal return is much higher than that of other emerging market countries. Since the establishment of the stock market in China, IPO abnormal return in A-share market has maintained extremely high for a long period of time, which got its myth of "New share no lose". That attracts a large abundant of capital to arbitrage and speculate in the primary market, thus causing a serious market inefficiency. This paper researched whether the prospectus of the issuer can effectively reduce the degree of information asymmetry and whether investors can effectively identify earning management in the issuer’s financial data and make a reasonable pricing. Whether the security market intermediary reputations work as a significant signaling tool in our country? Whether reputable intermediaries can reduce the IPO abnormal return? The answers to these questions will help to understand the impact factors of China’s IPO underpricing.The paper sorted out the classical theory on IPO underpricing from literature. Then the paper learn from the theoretical model proposed by western scholars, consider earning management behavior of the issuer in the IPO process and the Chinese underwriting system and analyze theoretical influential mechanism of the various components of the issuer’s earnings management and intermediary reputation on China’s A-share IPO underpricing. The paper made its assumptions, then select as a smaple588listed companies from Small&Medium board after equity separation reform, establish a multiple linear regression model and work out an empirical test of the impact of earnings management of the issuer and intermediary reputation on China’s A-share market IPO underpricing.Finally, according to the results of theoretical analysis and empirical research the paper found that earning management of the issuer significantly affect the IPO underpricing. There is a positive correlation between the operating cash flows and discretionary total accrual of the issuer and its IPO underpricing. The greater issuer’s manipulative accrual, the greater the IPO abnormal return. The greater the operating cash flow, the greater the IPO abnormal return. Investors cannot identify issuer’s accounting manipulation and often priced the company based on the reported earnings of the company. The reputation of intermediaries especially the underwriters’ reputation didn’t have a significant impact on the IPO underpricing. The reputation of underwriters, the reputation of the accounting firms and the reputation of the law firm cannot effectively reduce the IPO abnormal return. Intermediary reputation mechanism is not significant in China’s security market. Finally, we make policy recommendations towards issuers, intermediaries and regulatory authorities.