Study On Participants’ Behavior And IPO Pricing Under China’s IPO Inquiry System

Since China’s stock market was established,China’s initial public offering(IPO)market has undergone a number of reforms.In July 2020,the regulatory attempted to apply the registration system reform on the Chi Next board.However,the micro empirical evidence on the participants’ behavior and pricing under China’s IPO inquiry system is still lacking.In order to provide valuable empirical evidence for China’s IPO mechanism design,we focus on the IPOs during the longest and stable period of relative marketoriented pricing from July 2009 to November 2012.Using unique account-level bidding data in the primary market and transaction-level trading data in the secondary market from the Shenzhen Stock Exchange,this dissertation studies the behavioral patterns of participants and the effects of these patterns on IPO pricing.The main research contents and conclusions are summarized as follows:First,this dissertation analyzes the valuation information of underwriters’ analyst reports about the IPOs listed in the Shenzhen Stock Exchange during the market-oriented pricing period.The empirical results show that the underwriters have incentives to hype IPOs.Specifically,the valuation ranges proposed by the underwriters are much higher than the expected prices,and the earnings forecasts in the valuation reports are higher than the realized post-IPO earnings.Next,this dissertation combines the valuation information of underwriters’ analyst reports with institutional investors’ bidding details during the auction tranche.The empirical results show that the valuation ranges scaled by the expected prices are positively related to the bid prices scaled by the expected prices.Besides,the scaled earnings forecasts are positively associated with the bid price adjustments from the midpoint of valuation ranges.These findings indicate institutional investors’ bids follow the underwriters’ valuation information.Furthermore,our main findings are still robust after we add underwriter-investor pair fixed effects to capture the relation between underwriters and investors.Finally,we focus on the economic consequences and find that the valuation ranges scaled by the expected prices are positively associated with the offer prices scaled by the expected prices.Besides,higher scaled earnings forecasts are correlated with higher offer price adjustments from the midpoint of valuation ranges.Second,by using the allocation rule reform from pro rata to lottery draw as a quasinatural experiment during our sample period,this dissertation conducts difference-indifference regression models to analyze the rent-seeking behavior between underwriters and mutual fund investors.Empirical results show that,when the share allocation rule shifted from pro rata to lottery draw,mutual fund investors who have stronger commission ties with the underwriter bid later,submit more strategic and accurate bids,have a higher fraction of qualified bids,and are more likely to receive allocations than mutual fund investors who have weaker commission ties with the underwriter.The results suggest that mutual fund investors who have commission ties with the underwriter can obtain the bidding information leakage from the underwriter and provide evidence to support that the rent-seeking behavior also exists under China’s IPO inquiry system.Third,using the unique transaction-level trading data on the first day after listing during the market-based pricing period,and based on decomposing the IPO underpricing into the primary market underpricing and the secondary market premium,this dissertation explores the process and mechanism of how media coverage affects IPO pricing by influencing investor sentiment from a micro perspective.The empirical results show that media coverage does not have a significant impact on the offer price in the primary market,but it elevates the first-day closing price in the way of influencing inexperienced investors’ large amounts of high-priced net buying.Fourth,this dissertation also empirically studies a hot issue of how the new shares speculation occurs on the first trading day by using the unique transaction-level trading data on the first day.By dividing the investors into the following groups,including experienced retail investors,inexperienced retail investors,and institutional investors,the empirical results indicate that experienced retail investors and institutional investors may be the initiator of new shares speculation,and inexperienced retail investors may be the follower of the speculation.Experienced retail investors and institutional investors push up the stock price via buying behaviors and attract inexperienced retail investors to follow.The tightening of the temporary trading halt does not serve as an effective warning to investors,but instead,it encourages the investors to shift the speculation window from the continuous auction stage to the opening call auction stage.This research can provide an empirical reference for understanding the economic mechanism of the new shares speculation phenomenon in China’s IPO market.In summary,this dissertation systematically analyzes the behavioral patterns of investors during the IPO pricing process and the economic mechanism on how these patterns affect the IPO pricing.The conclusions enrich the literature on IPO pricing,deepen our understanding of the economic mechanism of IPO pricing under China’s IPO inquiry system,and could provide empirical evidence for regulators to reasonably and effectively regulate different participants during the IPO pricing process.