A Study On The Relationship Between The Quality Of Practice And The Market Share Of Investment Banks In China 's IPO Market

Since the implementation of sponsorship system in the initial public offering (IPO) market, investment banks have played an increasingly important role in the practice of IPOs and gained enormous profits in the fast expansion of China’s IPO market. While at the same time, after IPO performance of large amount of issuers plummeted soon compared with that before IPO, triggering common concern toward practice quality of investment banks in sponsoring and underwriting.In the light of established theories on function of investment banks in IPOs and features of China’s sponsorship system, this paper interpreted the contents and features of investment bank practice quality and conducted empirical tests regarding how practice quality will affect market shares of investment banks in China’s A-share IPO market. Based on their functions, the paper claimed that practice quality of investment banks in IPO market include three basic factors as the ability to identify issuers with promising long-run performance, to carry out thorough due diligence and information disclosure, and to improve pricing accuracy. Then, three variables were established to measure each of them, namely, average excess return of issuers’stock after one year from IPO sponsored and underwritten by the investment bank in the present and previous3years, proportion of issuers that experienced after IPO performance plummet in all those sponsored and underwritten by the investment bank in the present and previous3years, and the absolute value of average abnormal initial return of issuers’stock sponsored and underwritten by the investment bank in the present and previous3years. The paper used data of China’s A-share IPO market from2008to2011to test and verify how investment banks’practice quality has influenced their market shares.Empirical results revealed that in China’s A-share IPO market, investment banks’ ability to identify issuers with promising long-run performance had no significant effect on their market shares. While moderately lower practice quality in due diligence and information disclosure helped them gain significant larger market share. The ability to improve pricing accuracy only helped them gain more IPO clients, but no more raised funds. So the paper concluded that healthy relationship between investment banks practice quality and market share hasn’t established yet in China’s A-share IPO market.