A Study On The Influence Of Over-allotment Option And Underwriter Reputation On The IPO Pricing Efficiency

IPO pricing efficiency is an important indicator of the stock market maturity, it not only directly affects the financing and resource allocation function of the capital market, but also influences the long-term development and prosperity of the capital market. So the IPO pricing efficiency has always been the focus of research on stock market. In order to improve the efficiency of IPO pricing, China has taken a series of financial reforms referred to the mature stock market operation mode. As a result, the marketization degree of IPO distribution in China has been improved, but the phenomenon of IPOs’ short-term strong performance and long-term underperformance has not fundamentally changed. In contrast, the over-allotment option and the underwriters reputation have played an important role in the U.S. stock market during the IPO process, they can reduce the risk of issuing, maintain stability of the IPOs’ price, and promote the rational pricing of IPOs. Given this, studying the influence of over-allotment option and underwriter reputation on the IPO pricing efficiency has both theoretical and practical value.To analyze the impacts of over-allotment option and the underwriters reputation on IPO pricing efficiency, this paper first introduces the concepts and theories of over-allotment option and underwriter reputation in detail, and describes the application and funcion of them in China’s IPO process. The IPO is a complex process, it can be affected by many factors, and only in a certain market environment, the over-allotment option and the underwriter reputation can work, so this paper arranges a chapter to describe and analyze China’s IPO environment. On this basis, this paper builds a profit model of underwriters with reputaion cost under consideration, and makes the profit and repution of underwriters can both be reflected in the model. And then it explores the microscopic mechanism of the formation process of IPOs’ offering price. By analysing the underwriters’ pricing model, this paper obtains the optimal offering prices under different subscription conditions and different expected market performances, proves the over-allotment option and the reputation of underwriters both play a role in improving the efficiency of IPO pricing, makes the underwriters’ exercise strategy clear, and further demonstrates the importance of the over-allotment option and the underwriters reputation to IPO pricing. The above analysis results provide a theoretical basis for the fifth chapter’s empirical test. The empirical test using the 620 stocks as samples, which going public during September 2006 to November 2010 in China’s A-share market, the results showed that: the impact of over-allotment option on IPO pricing efficiency is not significant; but there is a significant positive correlation between the underwriter reputation and IPO pricing efficiency, but the impact coefficient is small. The results mean that, the over-allotment option and the underwriter’s reputation have not fully played their role in China’s A-share issuance market, the main reason is that China’s A-share issuance market is not mature yet. Thus, China needs to further deepen the stock market reform and improve the institutional building and marketization degree, and consequently promote the market efficiency.