Bid Competition Between Institutions And The IPO Pricing Efficiency

We use the SME board’s and GEM board’s private and unique institutional quotation data during the IPOs book-building process between 2009 and 2012 obtained from Shenzhen Stock Exchange,to explore the pricing efficiency of IPO from the perspective of bid competition between institutions.First of all,comparing with the previous research,we construct a new institutional bid competitive index ICI.Though the cutline analysis we find that comparing with the skewness index,the ICI can depict the investors’ competition in the IPO book-building process more precisely.In addition,when we find this institutional bid competitive index can absorb the effect of the skewness,we also test that the excessive bid competition between institutions will lead to higher oversubscription,higher initial public offerings’ P/E ratio,higher offer price as well as decrease the after-IPO long-term stock returns,therefore decrease the IPO pricing efficiency.Further more,the main contribution of the paper is to find the economic mechanism of the above results for the first time based on the unique data we used.Concretely,first of all,in the paper,we discover the reason why the excessive bid competition between institutions decrease the IPO pricing efficiency from the special perspective of allocation regulation for the first time.when the second IPO reform changed the allocation regulation in 2010,bid institution lost their reason to compete excessively;we set the second IPO reform as a natural experiment,to analyse the change of bid institutions’ competition behavior.The results show that when the allocation regulation changes,bid institutions’ behavior becomes more cautious,and the adverse effect between competition and “three high” problem and long-term underperformace problem becomes somewhat alleviated.Secondly,In order to test what kind of institutions’ excessive bid competition will decrease the IPO pricing efficiency,we divide the quotation data by bid price to construct radical institutional bid competition and moderate institutional bid competition,to study the effect of institutional bid competition on the “three highs” under different bid level.The study find that only excessive bid competition between radical institutions will lead to “three highs” problems and IPO long-term underperformance,while moderate bid institutional competition won’t be related to the problem "three high" and weak long-term performance.Further,we also study the impact of the allocation regulation reform on the excessive competition behavior between institutions.The results show that when allocation regulation changes,the radical institutions’ bid behavior changes,and the excessive competition cause less bad effect.Overall,the contribution of the paper is: based on the unique data we used as well as the more precious institutional bid copetition index we constructed,we set the second IPO reform as a natural experiment,firstly find the economic mechanism of how institutional bid competition influence the IPO pricing efficiency is allocation regulation.Further,the paper finds that the competition between the radical bid institutions is the main reason for the decrease of the IPO pricing efficiency,and the competition between the moderate bid institutions has less influence on the "three highs" problem.At the same time,the economic mechanism of how radical institutional bid competition influence the IPO pricing efficiency is also allocation regulation.