The Analysis Of IPO Underpricing And Abnormal Returns Of PE-backed Firms

The private equity investment (PE) is the investment of non-listedcompanies, and private equity institutions can gain high yield through IPO,mergers and acquisitions and management buy-back of those backedcompanies. In order to find out whether certification effect exits for PEfirms to the baked companies by reducing the IPO underpricing, selectcompanies which went to public in Chinese market during2009and2012assamples, define deliberate underpricing by stochastic frontier analysis, andcombine T test and multivariable linear regression to test the influence of PEto deliberate underpricing and initial day returns of those PE-backed andnon PE-backed companies.The results show that PE-backed companies have a higher issue price,higher P/E ratio, but lower offering volume, and they often attract biggerunderwriters. Comparing the deliberate underpricing show that PE-backedcompanies have a significantly lower deliberate underpricing. This verifiesthe certification effect. Furthermore, separate the influences of IPOdeliberate underpricing and market behavior from the initial day return, andmore than70%from the initial day return was caused by IPO deliberateunderpricing. In addition, a multifactor linear regression verifies the resultswhich also show that certification effect is in presence. This has once againproven the applicability of stochastic frontier analysis in the topic of IPOpricing.