A Study On China’s IPO System Reform And Pricing Efficiency

The book building system has been adopted in China since 2005,and its challenges in pricing discovery have been widely discussed in the academic community over the years.The China Securities Regulatory Commission(CSRC)has carried out seven reforms to optimize the method,yet the first-day returns of the IPOs still remain high.To this end,the paper explores the effects of the reforms on the book building process,and the causes of currently inefficient pricing discovery.Since the intrinsic value of stocks is difficult to estimate,this paper uses the stock price fitted by the stochastic frontier model as the unbiased estimate of intrinsic value,and the validity of issuance price is indicated by whether the actual issue price is on the effective frontier.The paper first analyzes China’s five major book-building reforms in recent years,and proposes that the stock market development can be divided by the five reforms into six stages.Then,the paper examines the stock pricing efficiency of each stage.Based on empirical results,the paper finds that the second stage(during the market-oriented reform,from October 2009 to October 2010)is the only period when the issue price reached its effective frontier,while the other stages saw a certain degree of underpricing.This shows that the pricing efficiency of China’s issuance market still needs to be improved.In terms of the effects,the reforms of the inquiry system in 2009 and 2015 improved the IPO pricing efficiency to a certain extent,while the remaining three reforms did not significantly improve the pricing efficiency of IPO.China’s issuance market needs further marketization and improved pricing efficiency.Finally,this paper analyzes how the underwriters,institutional investors’ behaviors affect the pricing efficiency of China’s new share issuance under the current book-building system in China.It is found that under this stage,the reputation of underwriters is positively related to the pricing efficiency of China’s new share issuance.The number of quotations of offline investors is also proportional to the pricing efficiency,explained by the fact that the participation of quotations can reduce information asymmetry.The difference in the number of offline investors with an information advantage and offline investors information an information disadvantage is inversely proportional to the efficiency of IPO pricing.It shows that there is no difference in the amount of compensation to encourage information superior investors to provide more information to improve pricing efficiency.Based on the analysis of China’s IPO pricing efficiency and the influencing factors of IPO pricing efficiency in different stages,this paper proposes that it is imperative to strengthen the market-oriented reform of IPO and regulate the behavior of institutional investors,in an effort to further improve the efficiency of China’s IPO market.