Abstract
When all the stocks are circulating in a hot market, Ljungqvist, Nanda, Singh(2003)(referred to as LNS model) first researched the IPO underpricing based on investor sentiment and proved that the optimal decision of underwriter is to oer stocks by many times. IPO underpricing is to compensate for the risk that the hot market will end too early. Combining LNS model with the split share structure in China, this paper researches the impact of split share structure on IPO underpricing, and poses a systematic theoretical model and proves the rationality of theoretical model through analysis of empirical. First, we analyze the case that the issuer sells IPO stock directly (direct selling) based on split share structure. The issuer is best to oer shares with many times to get a higher profit. Second, we also analyze the case that the issue chooses underwriter to sell IPO stock (underwriting) when the stock market exists split share structure. This case is divided into two cases: the underwriter has no non-tradable shares or has some non-tradable shares. The underwriter is also best to oer shares with many times. Compute the models of IPO underpricing of the two cases with maximum profit of the issuer and underwriter’s participation constraint. Through the models, we can see that the reform of split share structure does reduce the size of IPO underpricing with some requirements on the price and quantity of non-tradable shares. This also promotes Chinese stock market to further developing and mature.
Highlights
IPO underpricing is a phenomenon that the initial issue price of newly issued shares in the primary market is lower than its listing price in the secondary market
Some researchers said it is IPO overpricing, which is a phenomenon that the listing price of newly issued shares in the secondary market is higher than its initial issue price in the primary market
He found that the average price of the new stocks after a month in the secondary market is higher about 12.87% than in the primary market through researching the stock price of initial public offering from 1960 to 1969
Summary
IPO underpricing (initial public offering) is a phenomenon that the initial issue price of newly issued shares in the primary market is lower than its listing price (the closing price on the first day) in the secondary market. The split share structure means that the stock in the listing firms is divided into two kinds (tradable shares and non-tradable shares). The tradable shares refer to the stock in the listing firms that is offered publicly and the shareholder can transact in the bond exchange. The non-tradable shares which can not be transacted in the secondary market refer to the stock that the publisher sell to the investors through private transfer agreement signed, and it includes the country share, legal person’s, the inside staff’s and so on. The split share structure reform was carried out in Chinese market in 2005.The government transform the transaction from the non-tradable shares to the tradable shares. The value of tradable shares is protected and the evidence of progress in the stock market of China is evident
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