The Effect Of Banking Credit On Initial Abnormal Return

As a combination of theory and practice, this paper investigates the explanation role of banking certification theory on IPO underpricing mystery on primary market by studying on the relationship of banking credit conditions and first-day initial abnormal return for Chinese GEM listed companies.IPO underpricing refers to a phenomenon that the after-IPO trading price of new stock is far higher than its issue price. This phenomenon leads to a huge price gap between primary market and secondary market, causing the initial abnormal return large. IPO underpricing exists in many stock markets, and Chinese market is no exception. The average level of initial abnormal return in Chinese A-share stock market is much higher compared with other emerging markets, let alone mature markets.According to the modern banking theory, in order to reduce the information asymmetry, enterprises develop long-term relationships with financial intermediaries, which allow banks to assess enterprises’credits, thus supervise and restrict lenders. Existing researches have confirmed that banking credit plays a certification role on enterprises from the perspective cf secondary market. Since banks are equipped with scale effect, advanced information collection technology and sustaining lending-borrowing relationship with debtors, they enjoy a significant cost advantage and an easier access to acquire private information. All these factors made banks particular supervisors, so as to effectively ease the information asymmetry problem.This research aims to prove this unique bank certification role from primary market perspective by studying on whether the existence of bank loans would lower the degree of IPO underpricing and decrease the initial abnormal return. Taking the information asymmetry as a connection point, this paper unites IPO underpricing theory with banking certification theory so as to put forward the following hypothesis: Due to the existence of bank certification role, which depresses the information asymmetry impact, enterprises with banking credits when they go public have a lower degree of IPO underpricing, giving expression to a lower initial abnormal return. To verify the hypothesis, this research takes 355 Chinese GEM listed companies during 2009 to 2012 as samples, designs 3 banking credit related variables, proposes 4 reasonable hypotheses, establishes research models, conducts empirical tests and finally comes to the conclusion. It has important theoretical and practical significance.This research finds out that banking certification theory does have some explanatory power on IPO underpricing mystery and this effect is mainly reflected on primary market pricing, rather than secondary market trading. This paper has 4 findings in conclusion. First, the nature of the largest lending bank has insignificant relationship with initial abnormal return. Second, the loan amount of the largest lending bank has insignificant relationship with initial abnormal return. Third, the total number of lending banks is significantly negatively related with initial abnormal return. Fourth, the effect of banking credit on initial abnormal return is mainly reflected on issuing price on primary market, rather than trading price on secondary market.