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Research on Influence of Underwriters’ Behavior and Reputation on IPO Underpricing

Author: SongZhe
Tutor: ShiJinYan
School: Dalian University of Technology
Course: Finance
Keywords: IPO underpricing Underwriters’ behavior Underwriters’ reputation
CLC: F832.5
Type: Master's thesis
Year: 2013
Downloads: 76
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Based on the distribution market background of China, this passage researches the long-existing IPO underpricing phenomenon from the perspective of underwriters’behavior and reputation.In the study of underwriters’behavior, we find that our present system of Inquiry and Placing may easily result in the Bundle of Benefits between underwriters and institutional investors which would make them build up the Alliance of Inquiry and Placing to gain premium income, so that they have a strong incentive to underprice. We employ the Evolutionary Game Model to study the influence of the Alliance of Inquiry and Placing on IPO underpricing. and the change of the influence with the evolution of the market situation. We also study the phenomenon of underwriters’ taking advantage of small and medium-sized investors’sentiment theoretically:that underwriters and institutional investors are inclined to stir up trading price after listing to gain premium income.We research the particularity of underwriters’ reputation in China, and establish a model of underwriters’ reputation influencing IPO underpricing, and find that underwriters with high reputation can increase the discount of underpricing to some extent. This is why the underwriters’reputation mechanism is inefficient or even failure in China:The companies to be listed are likely to accept the high underpricing from high-reputation underwriters, because they care very much about the underwriters’ reputation.Empirical tests find that the greater the influence of the Alliance of Inquiry, the higher the degree of IPO underpricing. And the higher the investor sentiment, the greater the IPO underpricing.But long-term high premium income is impossible:investment and financing channels in China’s capital market are increasing, the market rationality is growing, so that underpricing will gradually reduce. We also find that underwriters with high reputation will incur higher underpricing, and this phenomenon proves that the reputation mechanism in China is failure if we include PR capacity to get listing qualification in the evaluation of underwriters’reputation.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial market
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