The Relationship Between VC Involvement And IPO Underpricing

In the global capital markets, IPO Underpricing phenomenon is a common phenomenon, which attracts the attention of the domestic and foreign scholars. At present, many theoretical models have been developed to depict and analyze this phenomenon. Based on different perspectives, domestic and foreign scholars have formed a variety of standpoints. On the basis of empirical data from Europe and the United States mature capital market, foreign scholars have discussed the reason of IPO underpricing, and developed a "venture capital certification function theory, grandstanding theory and the theory of adverse selection to explain the IPO underpricing phenomenon. However, China’s capital market development is not quite mature; development time is shorter, which has its own uniqueness. And there exists many differences between China GEM and western capital markets. Considering the uniqueness of China’s capital market, those theories and models applicable for western capital markets may not be applied to Chinese capital markets. Therefore, it’s essential and important to study the relationship between VC involvement and IPO underpricing, based on the data from China’s GEM listed companies.Based on data from China’s GEM listed companies, this paper mainly explores the relationship between venture capital involvement and in the IPO discount from two aspects. The first aspect, we select268sample enterprises, those prospectus disclosed until December31,2011on China GEM. Then, we divide these data into two groups. Group one:GEM listed companies backed by venture capital (VC-BACKED FIRMS) and GEM listed companies not backed by venture capital (NON-VC-BACKED FIRMS), to conduct a comparative study, to analyze whether VC involvement have influenced the IPO underpricing rate of these two groups. The second aspect, we have chosen the GEM listed companies backed by venture capital, to further study certain characteristics of venture capital involvement, such as venture capital quantity, venture capital background, VC involvement time, VC share lock-up period, and their impacts on the IPO underpricing rate.The paper is divided into six chapters; each part of the paper includes contents as follows:Chapter1:Introduction. This part is mainly to clarify the background of this study, significance, research methodology, innovation and content, and to describe and analyze IPO market characteristics on China GEM, the development course of venture capital institutions, the status of VC, the characteristics of equity financing, as the groundwork of the whole paper.Chapter Ⅱ:Review of the Theory and literature review. By reviewing, combine and summarizes the theoretical results concerning domestic and foreign venture capital institutions, IPO Underpricing, we build the theoretical basis of this paper, and on this basis, we develop and put forward the framework of this study, as well as the research hypothesis.Chapter3:Review and Summary of the literature mentioned in the second chapter, consistent with the actual situation of China’s GEM listed companies, five hypotheses will be put forward on the relationship between venture capital involvement and the IPO underpricing.Chapter4:Research Methods and study design, this part discuss the content of the dependent variable, independent variables, control variables’selection, data sources, and models.Chapter Ⅴ:empirical test of the relationship between the IPO Underpricing and venture capital involvement based on data from the Chinese GEM listed companies. This part gives results of empirical analysis, to verify the underlying assumptions mentioned above, and in accordance with the practice characteristics and behavior of listed companies in China GEM IPO and venture capital institutions for further explanation and analysis.Chapter Ⅵ:Conclusion. The final summary of the content and conclusions of this study, and suggestions for the IPO companies on China GEM, venture capital institutions and other stakeholders who participates in the main recommendations. Meanwhile, we analyze the contributions and limitations of the paper, as well as recommendations for the future research.Subsequently, we have the following conclusions based on empirical data from GEM-listed companies in China:1. No significant relationship between venture capital involvement and the IPO underpricing;2. there exists significant negative correlations between venture capital number and IPO underpricing;3. There exists no significant relationship between venture capital background and IPO Underpricing;4. negative correlations between venture capital involvement time and the IPO underpricing haven’t been verified;5. There exists significant negative correlation between venture capital lock-up period and IPO Underpricing.Finally, based on the relevant theoretical basis, the actual situation of China GEM listed companies and their own characteristics, to analyze and discuss the possible reasons for these conclusions, and recommendations for IPO participation, as well as discussion about the future research.