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Frontiers of Economics in China

Front. Econ. China    2017, Vol. 12 Issue (2) : 280-308     DOI: 10.3868/s060-006-017-0013-0
Orginal Article |
IPO Pricing Efficiency in China: A ChiNext Board Focus
Qi Deng1(), Zhong-guo Zhou2()
1. Accounting and Finance Group, International Business School Suzhou, Xi’an Jiaotong- Liverpool University, Suzhou 215123, China
2. Department of Finance, Financial Planning, and Insurance, David Nazarian College of Business and Economics, California State University, Northridge, CA 91330-8379, USA
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Abstract

This paper examines what determines the offer price for a ChiNext IPO and discusses how we can improve the current “Chinese-style” bookbuilding process. We establish that the ChiNext IPO underwriter relies upon the institutional investors to discover the issuer’s intrinsic value (in the form of a preliminary price), and that the same underwriter adjusts the preliminary price to establish the final offer price, based on its assessment of the institutional investors’ motivations. Since the underwriter does not have discretionary power in new share allocation, this “Chinese-style” bookbuilding process contains certain pitfalls from an information asymmetry standpoint. The institutional investors mainly use “simple and direct” variables that do not adequately reflect the issuer’s true intrinsic value to develop the preliminary price, while the underwriter adjusts that price downward to establish the offer price to clear the market, as a measure to counter a perceived free-rider issue among the institutional investors. This process, in effect, contributes to initial IPO underpricing and causes principal-agent conflicts between the underwriter and the issuer. We argue that such a pricing inefficiency could be improved by an innovative “bookbuilding plus price discretionary auction” process, which is a combination of the modified OpenIPO and Taiwan-style auctioned IPO approaches.

Keywords ChiNext IPO pricing      underwriter      offline and online investors      bookbuilding plus price discriminatory auction      free-ride      principal-agent and moral hazard problems     
Issue Date: 17 July 2017
 Cite this article:   
Qi Deng,Zhong-guo Zhou. IPO Pricing Efficiency in China: A ChiNext Board Focus[J]. Front. Econ. China, 2017, 12(2): 280-308.
 URL:  
http://journal.hep.com.cn/fec/EN/10.3868/s060-006-017-0013-0
http://journal.hep.com.cn/fec/EN/Y2017/V12/I2/280
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