Research On The Relationship Of Underwriter Reputation And IPO Long-run Underperformance In China

Since Ritter(1991) propose the IPO long-run underperformance in his classic paper,IPO long-run underperformance has been brought to scholars’ attention. And it hasbecome one of the most active IPO research fields in1990s. Lots of foreign scholars andmany developing countries’ scholars have carried on the analysis of IPO long-rununderperformance phenomenon from the different angle, they hope to be able to explainthis phenomenon, including research on the relationship between underwriterreputation and IPO long-run underperformance.In the IPO process, underwriter reputation plays an important role. Underwriterreputation ensures that the underwriter plays the “information disclosure” and“intermediary” functions. As the important intangible assets, underwriter reputation is theenterprise and investors’ approval mark about long-term performance of underwriter.Underwriter reputation can not gain from short-term transaction, it is a long term process,and it is innate vulnerable. In order to maintain its reputation capital、improve futureincome and increase market share, the underwriter often avoid underwriting the IPOwhich has higher risk. The underwriters who have higher reputations tend to choosethose companies which have good returns and future development potential. It means thatthere is the negative relationship between underwriter reputation and IPO long-rununderperformance.This paper selects175A-share IPO data listed in Shanghai and Shenzhen stockexchanges in2008and2009as the sample. Based on data within three years, it revealsthe relationship between underwriter reputation and IPO long-run underperformance.This paper uses buy and hold period method to calculate the long-term return rate of IPOenterprises and adopts the market share method to rank the underwriter reputation. Inaddition, it introduces other three explain variables: initial return, the first day’s turnoverrate and the gross proceeds for each offering(SIZE).Then the model is constructed. Afterthe correlation detection among the explanatory variables and explained variables, itanalyzes the multiple linear regressions.The study discoveries that the underwriter reputation mechanism doesn’t give full play in the China’s sock market, especially in the2008、2009.It means that theunderwriter reputation does not play role in China’s financial market. This may be relatedto the ineffectiveness of China’s securities market and defective of the regulatory system.So it leads to the negative relationship between underwriter reputation and IPO long-rununderperformance in China is not particularly noticeable. Finally it puts forward therelated suggestion. For example, improve the IPO screening mechanism andestablishment of mature supervision mechanism and so on.