The Relationship Between The Underwriting Fee And Enterprise Quality Under The Sponsor System

With the development of the capital market, various ways of financing arise. The initial public offering is one of them. Firms need to take the probability of success and the costs of financing into consideration, especially the underwriting fees. They also pay attention to the effectiveness of the capital market. To study the relationship between the underwriting fee ratio and the quality of the enterprises, I collect data of the enterprises during 2007-2012 and use the factor analysis. I develop the model to estimate factors that measure the quality of the firms. Those factors created are comprehensive index of the quality of the firms. I regress the underwriting fee ratio on the quality of the firms at the time of IPO as well as the first and second year after IPO. These regressions are supposed to test the effectiveness of the capital market. The results suggest that ten of the eleven factors approve the quality of the firms at the time of IPO is higher than the quality after IPO. Besides, at the time of IPO, the higher the quality of the firms, the lower the underwriting fee ratio. One year after IPO, the lower the fee ratio, the higher the quality. However, two years after IPO, the relationship between the underwriting fee ratio and the quality of the firms is insignificant. To some extent, it reflects that there exists false information of the quality when IPO is under process. It also indicates the ineffectiveness of the underwriter reputation system and the weakness of market supervision.