Research On IPO Inquiry System And Underpricing In China

IPO Underpricing has always been an attracting phenomenon for enormous scholars. Since2005China has introduced the inquiry system of IPO pricing, the degree of IPO underpricing has mitigated. However, China is still facing a more severe IPO underpricing than western countries, which means that there’s more to be improved in the inquiry system.Among all the theories trying to explain the IPO underpricing phenomenon, Partial Adjustment Model and Prospect Theory seems to be more plausible. In Partial Adjustment Model, public information is fully reflected by the initial price since it’s freely available, while private information is only partially reflected by the initial price. However, in Prospect Theory, both public and private information is partially reflected by the initial price. These two theories make the foundation of the framework and hypothesis of this research. The409samples of this research contain the IPOs in the A-share from2011to2012. After pooled regression, the author finds that, inconsistent with the previously mentioned two theories, private information is overly adjusted by the initial price. By developing a theoretical model, the author finds out the reason of this anomaly is that the underwriters in China don’t have the power to ration shares to investors discretionarily, thus lack of methods to restrict investors’behavior in an enquiry. In this condition, investors have more say in the determination of initial price than underwriters. The collusion among investors and the pursuit of new shares, both resulting from untruthfully conveying private information, will decrease the efficiency of IPO pricing. This phenomenon provides evidence of inapplicability of Partial Adjustment Model and Prospect Theory in China. In this article, the author also finds that the asymmetrical effects of price update and market return during the pricing period are both in favor of investors. Based on these findings, the author suggest that underwriters should have more power in share rationing, the determination of inquiry objects and the ratio of net purchases to on-line purchases in order to increase the efficiency of the inquiry system of IPO pricing in China. The author further points out the prerequisites for putting these suggestions into effect.This research is of highly theoretical and practical significance. The author have indicated the flaw of the inquiry system of IPO pricing in China, and further come up with some policy suggestions regarding this issue. Additionally, the author have examined the applicability of Partial Adjustment Model and Prospect Theory in China, provided empirical evidences from China, which is a supplement to these two theories.