A Study On IPO Pricing Efficiency Of China 's Investment Banks

After nearly two decades of rapid development, Chinese securities market has became a multi-level capital market system which consists of main board, small and medium-sized board, start-up board and the third board. It has became an integral part of the national economy, playing more and more important role on operation of Chinese economy. However, accompanied by dramatic increase of Chinese listed companies’ number and financing scale, the high issue price-earnings ratio and the high under-pricing phenomenon has been a hot topic of discussion in Chinese securities market. This phenomenon makes people doubt the effectiveness of Chinese IPO pricing.The research literature at home and abroad generally use the level of IPO under-pricing to measure the effectiveness of IPO pricing, and demonstrated and explained from information asymmetry and behavioral finance theory perspective. Overall, the information asymmetry model is on the premise of effectively market and completely rational, and the IPO price is under-pricing. Besides, behavioral finance theory admit the existence of irrational behavior, and the secondary market price is not valid. Previous studies has not yet formed a unified understanding.This paper makes an empirical test of the IPO pricing’effectiveness in Chinese IPO market, based on related theory at home and abroad. The empirical result shows that between2005and2012, the phenomenon of IPO under-pricing was widespread in Chinese IPO market, and with the publish of Announcement of the China Securities Regulatory Commission, the level of IPO under-pricing obviously decreased. IPO pricing of Chinese investment bank has some validity and can reflect the intrinsic value factors of the profitability, operating capacity, and compared with the start-up board, main board and medium-sized board shows higher effective. Besides, compared with the secondary market price, IPO price shows higher effective, so Chinese IPO under-pricing phenomenon can not completely explain with the information asymmetry theory.Meanwhile, this paper tests the relationship of investment bank’s reputation and IPO under-pricing effectiveness, investment bank’s fee and IPO under-pricing effectiveness. The empirical result shows that there is a negative correlation between our investment banking reputation and IPO under-pricing level, but this is not significantly. This empirical result means that our investment banking reputation mechanism has not yet been established. Compared with investment banks with higher reputation, IPO pricing of investment banks with lower reputation exhibit is more effective. And we don’t find the relationship of investment bank’s fee and IPO under-pricing effectiveness. The exchange rate of the first listed day and the level of IPO under-pricing is positively related, indicating that investor sentiment is an important factor affecting the level of IPO under-pricing.Finally, on the basis of this paper’s main conclusions, we proposed some relevant policy recommendations to guide investors rational pricing and strengthen the investment bank reputation mechanism.