IPO Pricing Efficiency in China: A ChiNext Board Focus

Qi Deng () and Zhong-guo Zhou ()
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Qi Deng: Accounting and Finance Group, International Business School Suzhou, Xi¡¯an Jiaotong-Liverpool University, Suzhou 215123, China
Zhong-guo Zhou: Department of Finance, Financial Planning, and Insurance, David Nazarian College of Business and Economics, California State University, Northridge, CA 91330-8379, USA

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2017, vol. 12, issue 2, 280-308

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 (search for similar items in EconPapers)
JEL-codes: G12 G15 G18 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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