Reputation and Opportunism in the Process of IPO Under-Pricing

Abstract

Purpose - The purpose of this paper is to empirically analyze the underwriter reputation effect on IPO issue price efficiency in China growth enterprise market based on information asymmetry theory, with using the residual income valuation mode to control IPO companies’ intrinsic value influence.

Design/Methodology/Approach - Using empirical research method, this paper design four empirical models to test the relationships between the underwriter reputation and the issue price and the degree of under-pricing and the underwriter fees and the over-raise funds.

Findings - By analyzing the data of China growth enterprise market, it is founded that in the context of China security market efficiency being not high, imperfect reputation mechanism can’t constrain underwriter’s opportunism behavior leading to third-party authentication function weakened. IPO issue price in China growth enterprise market deviates from intrinsic value and underwriters can’t reduce information asymmetry level between issuers and investors. Underwriter’s opportunism behavior makes underwriters and issuers interests become convergence. In the condition of issue price and under-pricing having no significant relationships, combined with underwriter’s opportunism behavior to take the high offer strategy striving for allotment shares is inquiry investors’ dominant choice.

Practical implications - The conclusion could provide a reference for the regulatory authorities to promote the reputation system and advance information transmission efficiency and establish punishment regime through ensuring that underwriters play effective third-party authentication.

Originality/value - This paper empirically analyzes and verifies, for the first time, the relationship between the underwriter reputation and the issue price and the degree of under-pricing and the underwriter fees and the over-raise funds. Using the residual income valuation mode to control IPO companies’ intrinsic value influence and the research of the relationship between the underwriter reputation and the underwriter behavior is a pioneering in China.

Keywords: Underwriter, Reputation, Intrinsic Value, Under-pricing, Information Asymmetry

JEL Classification: G18, G24, G12