The Split Share Structure Reform Impact Analysis Study On China Ipo Underpricing

As we know, the stock market in China is still in a relatively immature stage. The special factors of systems in China (such as the split share structure) have a great impact on IPO underpricing, and it leads to a higher IPO underpricing in China than some developed countries. Before the split share structure reform in 2005, most shares of listed firms are non-tradable, and the shares of public offering are only a few parts. The transactions of non-tradable shares mostly through private transfer agreement signed, and its price is far below the market price, so the investors to buy public offering shares will suffer a loss.For the market that exists non-tradable shares in our country, many researchers have discussed the IPO underpricing with the stock price in the secondary market and test it with empirical. But they lack of adequate theoretical support, especially systematic analysis of theoretical model. Moreover, the split share structure can't be solved completely in the short time, so the influence on the market is far from over. Then, study the influence of split share structure on IPO underpricing has theoretical value and economic significance.When all the stock are circulating in hot market, Ljungqvist,Nanda,Singh(2003)(referred to as LNS model) first researched the IPO underpricing based on investor sentiment and proved that the optimal decision of underwriter is to offer stocks by many times. IPO underpricing is to compensate for the risk that the hot market will end too early.With LNS and considering the split share structure in China, this paper researches the impact of split share structure on IPO underpricing, poses a systematic theoretical model and proves the rationality of theoretical model through analysis of empirical.First, analyze the case that the issuer sells IPO stock directly (direct selling) based on split share structure. The issuer is best to offer shares with many times to get a higher profit.Second, analyze the case that the issue chooses underwriter to sell IPO stock (under-writing) when the stock market exists split share structure. This case is divided into two cases: the underwriter has no non-tradable shares or has some non-tradable shares. The underwriter is also best to offer shares with many times. Compute the models of IPO underpricing of the two cases with maximum profit of the issuer and underwriter's participation constraint.Through the models, we can see that the reform of split share structure does reduce the size of IPO underpricing with some requirements on the price and quantity of non-tradable shares. This also promotes Chinese stock market to further developing and mature.