Does a reduction of state control affect IPO underpricing? Evidence from the Chinese A-share market

Abstract

The Chinese government has reduced state control and introduced partial private-sector oversight in the IPO market. We find that the underpricing of IPOs is lower under the Sponsorship System compared to the Approval System and show that a move towards a more market-oriented system reduces underpricing. We further examine the certification hypothesis and information production hypothesis by the underwriters and find evidence in favor of both. Using CSRC approval times, we find that the impact of public supervision on mitigating IPO underpricing is relatively minor in terms of both statistical and economic significance. In summary, our results show that the reduction of state control increased the efficiency of the Chinese IPO market.