A Study On Mechanisms For Pricing And Distributing IPO

There has long been high abnormal return in the primary stock market of China, attracting a huge sum of money lingering in the primary market seeking risk free abnormal return. It indicates that the primary market of China is inefficient. The inefficiency has led to serious results: it severely hurt the financing function of China's stock market, decreased the efficiency of resources allocation, aggravated the speculative atmosphere of the primary market, led to the waste of social resources, and negatively affected the long term development of the entire stock market.Theoretical and empirical studies have proved that the mechanism for pricing and distributing IPO is an important factor affecting the efficiency of the primary stock market. This paper tries to study the mechanism for pricing and distributing IPO and find some useful cues of improving the mechanism for pricing and distributing IPO now in use in China and hence improving the efficiency of issuing stock market and perfecting the functions of stock market. This paper suggests that the fixed price open offer mechanism is inferior to the auction mechanism and bookbuilding mechanism in terms of information soliciting price discovering, and there is still some discrepancy on whether auction is better than bookbuilding or vice versa. However, it has become a global trend that the bookbuilding method is gaining popularity all around the world. Utilizing the tools of auction theory and mechanism design theory, this paper shows that an optimal IPO mechanism should include an inherent element, i.e., the underwriter's discretion on allocating shares, and that when there is an oversubscription the extent by which institutional investors are rationed is a decreasing function of the signals they reported. In other word, the underwriter can encourage institutional investors to excavate and truthfully report related information on the market value of IPOs. The policy suggestions are: (1) firstly loosen the control on the supply of shares, discard the man-made filtering mechanism, realize the supply-demand equilibrium of stock market, and promote the standardization and maturity of entire stock market; (2) adopt various IPO mechanisms, improve the mechanisms now in use and introduce new mechanisms when appropriate; (3) adapt to the global trend and create necessary mechanisms needed to make better use of bookbuilding method.