On Effectiveness Of Investment Banks Reputation Under Sponsor System

Based on the investment bank prestige effects which established generally in the overseas mature capital markets cannot obtain the widespread experience to support in China. Taking the prestige theory as a foundation, and then with the knowledge in financial intermediary theory, investment bank prestige model, information economics and game theory, this article analyzes the investment bank prestige effects and formation mechanism, and emphasizes the important role of system factor during this process. Then on the basis of vicissitude of securities issue system and investment bank function evolves, this essay especially analyzes sponsor system's economic effects , and carries the theoretical analysis and the real diagnosis examination on the driving and signal demonstrating effects of investment bank reputation, and further proposes some measures on how to strengthen investment bank prestige effects in China.This paper thinks that in the stocks issuing market, the asymmetrical information between the publishers and investors causes investors'"reversion choice"and the publishers'"moral hazard", which harmed investor's benefits greatlly, and also reduced the stocks issuing efficiency. But the modern finance intermediary theory proved that the financial intermediation has the comparing superiorities in searching and screening projects'quality information, and inspecting operators'behavior with low costs. As the underwriter, investment banks are the core financial intermediations of stocks issue. They can transmit information such as the quality and valuation of publishing enterprises', and supervise their behaviors after they going to the stock market, by which alleviated the information asymmetry effectively between investors and issuers in IPOs. However, the subjective profit motivation and the objective differences in the professionalism threat the credibility of investment bank's information production. For investors and issuers, they often determine the true reliability of the information published by investment banks by their market performance over the past, so investment bank's prestige has been questioned. As the signal to reflect type of one economic entity under the condition of information asymmetry, prestige has the effects in encouraging and restraining the practice of investment banks, and showing the level and quality of their work.But the general reputation theory shows that investment bank's reputation must be formed and established through the certain mechanism. Specifically, except to repeated games of stock issuance, they also include the anticipated mechanism for investment bank to pursue long-term benefits, the information transmission mechanism about investment bank's practice, the supervising and punishment mechanism to investment bank's irregularities, and the market competitive mechanism to them, etc. Further from the fundamental point, these factors must first be constricted by the institutional environment. System is the game regulation of whole society. Systems and their changing will continue to affect and decide the main actions of those with reputation, and play an important role in the guarantee of investment bank's reputation mechanism and the full giving of its effect. Chinese security market is emerging. During the foundation of security market which pushed by government, securities issuing system has undergone a special evolution from administrative examination system, approve with channel system to approve with sponsor system. As the issuing system transiting from immature to mature stage, investment bank's function in the stock issuing market is also evolving. Compare to the others issuing systems in the past, sponsor system has realized the symmetry among investment bank's responsibilities, rights and benefits, which provided the feasible system foundation to investigate investment bank's responsibility. Especially, its recommending and securing regulation and the mechanism of responsibility investigation strengthened the investment bank's responsibility as a sponsor, and then given basic guarantee for the mechanism forming of investment bank's reputation. Under the encouraging and constriction of reputation, in order to establish and maintain good reputation for them, investment bank will always be diligent as far as possible during its practices and adopts the strictest appraisal standard to recommend and select issuers, and make reasonable price for them, through which to transmit comprehensive and real issuing information. Investment bank will continue to fulfill consultation and supervision responsibilities conscientiously after the stocks listed so as to ensure that issuers operate normally and use their raised-funds strictly according to the issuing instructions. Therefore, in the view of theory the following relationships should be concluded: investment bank's reputation have negative correlations to the excess rate of IPO returns and the probability of violation and raised-funds changing of listed companies, but has positive correlations to their achievement display.In the foundation of above theoretical analysis, this paper tests the validity of Chinese investment banks'reputation empirically under sponsor system. The results confirm theoretical hypothesis derived above in several degrees, which proved the effectiveness of Chinese investment banks'reputation under sponsor system. This conclusion verifies the basic proposition about the theory of investment bank's intermediary function in information production, quality certification and supervision, and prestige. It also gives proof to the practical effect of China's securities issuing system in some degreeAt last, based on the difference between China and others'mature markets abroad in some empirical test results relate to investment bank's reputation, this paper purposes the following measures to strengthen the effects of investment bank's reputation further so as to improve operating efficiency of the stock market, which including: improving the existing sponsors system and continue to promote market-oriented reform of securities issuing system, taking further improvement in the internal governance of investment bank to build incentive and restraint mechanisms, paying more attention to investors'education and cultivating their rational behavior, at the same time building efficient mechanism of information transmit and consummating the evaluating and supervising system of social prestige.