Underwriter Reputation, IPO Initial Underpricing and Underwriting Spread: Evidence from Chinese Stocks Market

Abstract

This paper examines the effect of underwriter reputation on IPO initial underpricing in Chinese stocks market over the period from 1999 to 2012.Since there are no tombstone announcements in Chinese stocks market, a substituted measure, face-changing ratio, is applied as the proxy of the underwriter reputation in accordance with the regulations of Chinese Securities Regulatory Commission (CSRC). Face-changing ratio is designed to denote underwriter reputation from the aspect of qualities of the companies underwrote by them. The underlying logic is that prestigious underwriters will only underwrite those high-quality companies since their reputation will be damaged by the low-quality companies, i.e., the face-changing companies. Also, MW measure is incorporated in the multiple regression models since it denotes underwriter reputation from the aspect of relative market share. Three regression models are set up to find out the relation between underwriter reputation and IPO initial underpricing.The regression results indicate that the underwriter reputation mechanism fails to work in Chinese stocks market. Although no significant relation is found between IPO initial underpricing and underwriter reputations, the changes of P-values imply that underwriter reputation has become increasingly important. In addition, this paper explains such empirical results from the aspect of underwriting spreads, suggesting that the relation between underwriting spreads and underwriter reputation is likely to contribute to the inefficiency of underwriter reputation mechanism.