Abstract
Compared with the fixed-price mechanism, the bookbuilding mechanism has not changed the Chinese IPO high underpricing. How to develop scientific and reasonable IPO pricing, and reduce the high IPO underpricing has become a major challenge for China's securities market. In this paper, using behavioral finance theory and game theory, we build the Initial public offering (IPO) pricing and underpricing models with investors’ heterogeneity based on different issuing mechanisms and provide a comparative analysis. Firstly, our models show that IPO underpricing will not be eliminated by using either fixed-price or bookbuilding mechanisms, but when the investors’ heterogeneity expectation is the same, lower IPO underpricing can be obtained by the issuing of bookbuilding compared with that of fixed price. Secondly, the IPO underpricing may be larger than that under fixed price if the heterogeneity of investors under bookbuilding is larger than that under fixed price. Thirdly, the numerical analysis results provide strong support for our model. These findings further explains the cause of the high IPO underpricing long-standing in China.
Highlights
Since China’s initial public offerings (IPOs) started adopting an accumulated bidding inquiry system in 2005, the average underpricing of an Initial public offering (IPO) on its first day is still above 120 % and market-oriented reform of stock issuing through bookbuilding has failed to fundamentally eliminate the IPO high underpricing phenomenon
Numerical analysis To discuss IPO pricing efficiency under different pricing mechanisms and provide numerical support for our results, we look at an example of a company IPO and apply the underpricing model to conduct a numerical and comparative analysis of the fixedprice and bookbuilding to gain a better understanding of management during the IPO process
In case these assumptions are removed, especially the heterogeneity of all the investors, it will be extremely difficult to solve the Conclusions Through the comparative study of IPO underpricing under different issuing mechanisms, we reach the following conclusions
Summary
Since China’s initial public offerings (IPOs) started adopting an accumulated bidding inquiry system in 2005, the average underpricing of an IPO on its first day is still above 120 % and market-oriented reform of stock issuing through bookbuilding has failed to fundamentally eliminate the IPO high underpricing phenomenon. The existing empirical research literature can only obtain relevant factors influencing IPO underpricing, but fails to theoretically explain why the IPO high underpricing phenomenon still exists under national market-oriented pricing mechanisms. Gouldey (2006), Beneda and Zhang (2009), and Xiaocheng et al (2008, 2011) further developed an IPO pricing model based on this and explained the reason for IPO high underpricing from the perspective of non-homogenous expectations of investors, but they still fail to research the theoretical influence of investor behavior on IPO underpricing under different issuing mechanisms. Domestic scholars have tried to discover the reason for the effects on national IPO efficiency from an empirical perspective, but have still failed to explain why market-oriented pricing cannot eliminate the IPO high underpricing phenomenon in China. Taking into account the unique combination of China's market environment and institutional background, scholars have put forward a wide range of theoretical description and speculation, but empirical research literature has usually only obtained the relevant factors affecting IPO underpricing, not to explain theoretically the fundamental reason for high IPO underpricing in China
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