The impacts of registration regime implementation on IPO pricing efficiency

Abstract

We study the impacts of regime changes and related rule implementations on IPOs' initial return for China's entrepreneurial boards (ChiNext and STAR). We propose that an initial return contains the issuer's fair value and an investors' overreaction and examine their magnitudes and determinants. Our findings reveal an evolution of IPO pricing in response to the progression of regulation changes along five dimensions, and the most efficient regulation regime in Chinese IPO pricing has the following characteristics: 1) registration system, 2) no hard return caps nor trading curbs that restrict the initial return; 3) more specific listing rules for issuers, 4) more strict participation constraints for investors, and 5) more stringent information disclosure requirements for issuers and underwriters. In all contexts, we show that the registration regime governing the STAR IPOs offers the most efficient pricing. We make recommendations on future regulation regime reform for China's entrepreneurial boards.