The Correlation Between Audit Quality And IPO Underpricing

IPO(Initial public offering)refers to the first time a company sells its shares to the public.The IPO underpricing refers to the phenomenon that the listed company's closing price on the first day of listing is much higher than the issuing price when it is first public offering of shares.The IPO underpricing phenomenon is contrary to the classical effective market theory,but this phenomenon exists vastly in every stock market in all over the world.IPO underpricing has become a hot topic in the theoretical circle,foreign scholars have studied this phenomenon since the 1960 s.On October 30,2009,the Growth Enterprise Market in China was finally launched in Shenzhen Stock Exchange.Launch of the GEM not only improved the structure of China's capital market,but also solved the problem of financing difficulties for small and medium-scale enterprises in China to a large extent.However,high IPO underpricing phenomenon still exists in the Growth Enterprise Market.Before the listing of a company,it must be audited by an accounting firm.The accounting firm acts as the typical third information party to professionally verify the information published by the company,which can effectively reduce the information asymmetry between the issuer and the investor.Pricing is more effective,so that investors in the secondary market can effectively judge company value and conduct rational investment.However,the audit quality of different accounting firms will be different.Different audit quality will inevitably have an impact on-IPO underpricing.Therefore,based on the information asymmetry theory,this paper will study the correlation between the audit quality of the Growth Enterprise Market and IPO underpricing.This paper uses a combination of normative research and empirical research.Firstly,we review domestic and international literature from three aspects: substitution variables of audit quality,IPO underpricing research,and the correlation research between the two things.Then,explained the definition of IPO underpricing and audit quality and the related theoretical.This paper based on the above theoretical analysis,adopt the empirical research method,and select listed companies of GEM in the ShenZhen stock market exchange in2009-2012 as research samples to explore the correlation between the audit quality and IPO underpricing.We adopt the accruals which estimated by the modified Jones Model as a proxy for audit-quality,and use the formula of underpricing rate to measure the underpricing level,and join some relevant control variables,establish a multiple regression model of audit quality and IPO underpricing.In order to further explore the different impacts of audit-quality on the issue price of new shares and the closing price of listed stocks,we established two regression model,the one this audit-quality with the issue price of new shares,anther one is audit-quality with the closing price on the first day of listing.The results showed that there is asignificant negative correlation between the audit quality and the IPO underpricing in China's GEM.which means the high audit quality will reduce IPO underpricing rate.At the same time,we find that the correlation between the audit-quality and the closing price on the first day of listing in the secondary market is stronger than the correlation with the issue price in the primary market,indicating that the audit quality mainly affects the decisions and behaviors of investors in the secondary market,and ultimately affects the rate of IPO underpricing.According to the empirical conclusions,this paper proposes some policy recommendations:First,accelerating the implementation of the registration system and establishing a market-oriented pricing mechanism;second,improving the CPA practicing environment and strengthening the CPA responsibilities;thirdly,actively guiding investors and encouraging rational investment;and fourthly,further strengthening system construction of China securities market.Compared with similar results,this study has made breakthroughs in the selection of explanatory variables and their substitution variables,selected audit quality as an influencing factor in the study of the IPO underpricing phenomenon,and measured it by the level of earnings management.It has enriched the research on IPO underpricing in China's GEM.