Divergence Of Institutions’ Opinion And IPO Underpricing

The Chinese IPO market is very disordered and one of the most outstanding problems is that IPO underpricing is too high. This paper studies the issue based on the theory of ex-ante uncertainty and the perspective of risk compensation.The bids of the offline inquiry institutions in the inquiry of new shares among IPO reflect the prior value assessment on the stock or the company of investors. The greater the divergence of the bids of the offline inquiry institutions is, the more difficult the prior accurate value assessment can get and the higher ex-ante uncertainty that investors facing is. The level of ex-ante uncertainty characterizes the size of risks and the higher the ex-ante uncertainty is, the higher the risks are. Investors require higher risk compensation when they are facing higher risk. Thus, the divergence of the bids of the offline inquiry institutions in the inquiry of new shares among IPO and IPO underpricing is a significant positive correlation. The empirical results of this paper based on the risky property of the divergence of the bids of the offline inquiry institutions and the perspective of risk compensation provide a new explanation of IPO high underpricing.Furthermore, the relationship between the institutions of the inquiry and the lead underwriter is different. A part of the institutions have a good relationship with the lead underwriter, and the other part has a common relationship with the lead underwriter. The institutions with a good relationship with the lead underwriter can get more information about this company which is to be listed from the lead underwriter(compared to the institutions of the inquiry, the lead underwriter has a better understanding of this company which is to be listed). Therefore, the institutions with a good relationship with the lead underwriter have information superiority and their prior value assessment based on their information superiority on the stock or the company is much more accurate. Thus, the bids of the institutions with a good relationship with the lead underwriter offer more information about the stock or the company and the divergence of the bids of the institutions with a good relationship with the lead underwriter discloses the risks faced by investors better. Investors require higher risk compensation when they are facing higher risk. Thus, compared to the institutions with a common relationship with the lead underwriter, the divergence of the bids of the institutions with a good relationship with the lead underwriter can offer a stronger prediction on IPO underpricing. The new perspective of relationship provides a new path to explore IPO underpricing.