Abstract

With the rapid development of China's national economy as well as the continual deepening of the reform of all political and economic systems, security market is playing a more and more important role in financial system of China. The opening of small and medium enterprise board in 2004 and establishment of growth enterprise market in 2009 both enrich and perfect the scale and channel of direct financing market of China. By the end of 2013, the total value of stock markets of Shanghai and Shenzhen were reported to be 23. 76 trillion yuan, and there were a total of 2 469 public companies, including 1 413 listed on the main board, 701 listed on the small and medium enterprise board and 355 on the growth enterprise market. The stock market of China has been established for only more than two decades, but the new share issuance system has undergone three steps and nine reforms. The three steps are the examination approval system with heavy administrative color, approval system of the issuance examination system of China Securities Regulatory Commission and the present enquiry system with the market leading the resource allocation. The new share issuing mechanism and pricing efficiency have been the hot issue in the theoretical and empirical research. In the meantime, they are also the difficulty in the market reform. About the pricing system and pricing efficiency of the new share issuance, the researchers at home and abroad have conducted vast theoretical and empirical researches, and gained a series of theoretical hypotheses and empirical results. However, the real world is far complicated than the financial theory. All theories are the abstract of the real world, and all demonstrations are based on certain hypotheses. The reform of China's new share issuance system becomes more and more market-oriented. In particular, the establishment of enquiry system of the new share issuance in January 1 st , 2005 became an important milestone in China's IPO market reform. Under the background of the new share issuance system, this paper conducts the study on the issues concerning IPO pricing.

The author, based on reviewing the domestic and foreign literature, expects to discuss the following issues:

(1) The Measure for the Administration of Securities Issuance, and Underwriting and Instructions about Deepening the Reform of New Share Issuance System, implemented on November 1 st , 2010, Which largely adjust the type of distribution of excessive subscription offline and cancelled the former regulations on the subscription, i.e. average ration. Whether the reform of the distribution system can improve IPO pricing efficiency and reduce the IPO under-pricing on the first day of issuance or not, which were the first question dicussed in this book.

(2) The core of the enquiry system of new share issuance is that the publisher entrusts the underwriter to collect and analyze the pricing information of the investors with advantages in information before deciding the issue price, and then issues the new share in different numbers to encourage the investors participating in enquiry deliver the useful information truthfully. As the most important market participant under the enquiry, what influence do the institutional investors have on the IPO pricing when they report the specific information during the market enquiry on the primary market. The Measures for the Administration of Securities Issuance and Underwriting and Instructions about Further Deepening the Reform of New Share Issuance System issued and implemented by CSRC in May, 2012, and largely increase the ration of the offline institutional investors. In the meantime, the former-regulated three-month lockup period were cancelled. The specific influence of these reforms on the issuance system on the enquiry will be the second question that this book answered.

(3) There are three kinds of new price variable in the process of IPO under enquiry system, namely the unobservable intrinsic price of new share, the offer price of IPO in the primary market and the closing price for the first day in the secondary market. In previous literature, the IPO underpricing is constructed by the closing price for the first day and the offer price of IPO, which measures the issuing efficiency of IPOs. Base on the basic assumptions of the efficient market, the western literature believed that the new share closing price for the first day in the secondary market can fully reflect the market information in a comprehensive way. Therefore, it is reasonable to establish the IPO underpricing through the closing price for the first day to measure the issuing efficiency. Since, the secondary market in our country has not reached the weak-form efficiency, there is significant difference in the judge of the new share value between the off-line inquirers and the retail investors in the secondary market. If the IPO underpricing simply calculated through the closing price for the first day, it might overestimates the influence which the retail investors' sentiments for the first day in the secondary market have on the pricing efficiency of IPO. So, in this chapter, what are researched as follows. Does our pricing efficiency of IPO in the primary market performs fully and efficiently under enquiry system? what's the impact that the three reforms in issue system by the CSRC have on the pricing efficiency in the primary market during the stage of the enquiry system? What factors will finally cause the new share to fall on debut? These are the third group of questions which are expected to be investigated in this book.

(4) As the financial medium integrating the industrial innovation and financial innovation, the venture investment has developed prosperously on China's stock market. Especially, since the small and medium enterprise board and growth enterprise market were established, a lot of venture capitals appeared on the public companies' lists of share holders. What influence would the venture capital invested in the equities of the companies applying for list on the IPO pricing efficiency? How do the numerous factors including the time of equity investment, ratio of investment of share and the reputation of the venture capital institutions influence the IPO pricing efficiency? When the lockup period of share holding of venture capitals is over, what changes will occur on the secondary stock market price. The fourth question will be answered by this book.

In order to answer the above four questions and obtain more robust empirical results, this book combines the practical situation of China's enquiry system with the data published on the capital market, collects manually the investors' data about the pricing items and venture investment at the enquiry stage, and applies numerous research methods of econometrics. This book consists of the following chapters:

Chapter One is the introduction of this book. Firstly, this chapter briefly introduces the research background and the meaning of this book, then maps the logical structure of research, main research contents and related research methods. Finally, it introduces the major academic contributions of this paper.

Chapter Two is reviewing of the IPO System and Process of the Current IPO.In this chapter, we will briefly review the three stages experienced by the IPO system in our country, and introduce the specific way to issue the new shares in each stage, then describe the specific processes of the new stock issuing under enquiry system in an all round way.

Chapter Three is literature review. This chapter focuses on reviewing the relevant research literature at home and abroad, organizes the research front of IPO area as well as the gained results, lists the research and analytical methods applied in this study, and finally analyzes the defects in the existing literature in order to find out the deeper research orientation.

Chapter Four is about the reform of distribution system and new share issuance efficiency. This book use the data about public companies issuing stocks for the first time from 2009 to 2011 and doing the transactions on the stock market by constructing a natural experimentation. It uses the double difference model to remove the internal problem caused by the unobservable heterogeneity. Then, it investigates the influence of the second-step reform of the distribution system of the new share issuance enquiry system on the pricing efficiency of new share issuance. Finally, it points out that the direction of the future reform of issuance system is to further improve the autonomous ration rights of the principal underwriter. According to the empirical result, under the heterogeneous condition of controlling different boards, it's helpful that the second-step reform of the distribution system cancels the average ration of the excessive subscription to the improvement of the IPO issuance pricing efficiency of small and medium boards, and this reform doesn't noticeably affect the growth enterprise market. The irrational emotion of blinding promoting the secondary market may be the important factor that impacts the IPO pricing efficiency of the growth enterprise market.

Chapter Five is about the quotation behavior of the enquiry institution and new share issuance efficiency. Based on the data of the China's 463 A-share IPO companies from November 2010 to October 2012—to be specific, 45 630 groups of micro data of detailed pricing and subscription. This chapter applies the empirical data to map the characteristics of the enquiry object's quotation behavior during the subscription of new shares and to sketch the influence of the third-phase reform of issuance system on the quotation behaviors of the enquiry institutions participating in the new share issuance. In addition, it tests whether there is the hypothesis of ‘winner's curse’ on the A-share market. According to the findings, as to the enquiry object with advantages in information, the average value of the quotation during the enquiry is positively proportional to offline Oversubscription on the first of new share issuance. In this way, the above-mentioned hypothesis of ‘winner's curse’ is verified. In May 2005, the reform of increasing the offline new share ration and cancelling the offline institutional investors' allotment lockup period was implemented, thus making the enquiry object more careful about the quotation. The atmosphere of the secondary market is still an important factor that affects China's new share issuance pricing efficiency.

Chapter Six is the Stochastic Frontier Analysis of the issuing efficiency of IPO under enquiry system. In this chapter, 647 IPO enterprises from the small and medium sized enterprise board during the period from June, 2006 to November, 2012 were picked up as the study samples to take an empirical test of the IPO pricing efficiency in the primary market with the help of the stochastic frontier analysis model. It turns out that there exists the artificially underpricing phenomenon in the new share primary market under enquiry system for all the samples, and the offer price of the new share is lower than the stochastic frontier boundary. The three reforms in issue system have significant influence on the IPO pricing in the primary market under enquiry system.Before the first reform in June, 2009 and after the third reform in May, 2012, the CSRC conducted the ‘window guidance’ to the new share price. As a result, the artificially low offer price appears in the primary market, and the new share primary market is not completely valid. The downturn atmosphere in the secondary market causes the low closing price for the first day. This is the main reason why the new share falls on debut.

Chapter Seven is about the venture investment participation and new share issuance efficiency. Taking Chinese companies listed on the small and medium enterprise board and growth enterprise market (GEM) during the period of 2009 and 2012 as the sample, this book conducts a empirical research on the influence of the venture investment participation and venture investment reputation on the share issuance pricing efficiency and on the capacity price effect before and after the cancellation of the lockup period of venture capital participation by using the propensity score matching and event study method. In the research sample of this book, the venture investment is not equipped with authentication effect and grandstanding effect, but abnormal turnover and abnormal yield of the public companies with participation of venture investment are more noticeable after the lockup period is cancelled. In addition, the accumulated rate of return to investment is inversely proportional to the abnormal rate return of the stocks in lock-up period.

Chapter Eight is about conclusion and prospect of research. This chapter summaries the principal research conclusions, and based on this, further discusses the possible research content in the future.

The innovation of this paper is manifested in the following aspects:

(1) The DID is applied to identify the possible policy effects of the reform of new share issuance system in 2010. As the new policy only affects the pricing distribution system of the small and medium enterprise board and growth enterprise board, and does not have influence on the main board market, this allows us to deem the policy as a approximately natural experiment: the small and medium enterprise board and growth enterprise board are combined and taken as a treatment group, and the main board market as the control group. In addition, the DID is used to investigate the influence of this policy change on the pricing efficiency of the new share issuance. This method has been widely used in economics, but in analyzing China's IPO pricing efficiency it is the first time. The DID is applied to removed the unobservable heterogeneity of the differences of the treatment group and control group before and after the policy change, in order to gain more robust conclusion on the policy evaluation.

(2) It's the first time that the research sample of China's 463 IPO public companies and the 443 enquiry objects as well as their 45 630 groups of detailed micro pricing and subscription number is used to empirically analyze the pricing features of the institutional investors (enquiry objects) of different types, eg. regions and reputations. In the meantime, it's the first time that the data of the detailed micro pricing of the institutional investors during the enquiry are applied to construct two kinds of enquiry objects with informational advantage. Furthermore, the real micro pricing data of the enquiry objects are applied to prove the Rock's (1986) ‘winner's curse’ hypothesis. Moreover, it empirically confirms the influence of the implementation of the third reform in the new share issuance system in May 2012 on the quotation behavior of the institutional investors.

(3) Based on these three important IPOs reforms, this book divides the research samples into four stages, and using stochastic frontier analysis models investigate the efficiency of Chinese IPO enquiry system and the impact of CSRC's ‘window guidance’ policies. This book also tests the main influence factors of the enquiry system under the new issues fall on debut.

(4) As few samples were used in the former literature about the venture investment, this book expands the number of the research sample to 642, thus effectively solving the problem that insufficient research samples may lead to unsteady conclusions. As for the method of estimation, PSM is used to effectively handle the internal selection between the venture investment and invested enterprises. Considering it's unable to provide the specific matching relation theoretically on the selection of the matching variable, this paper provides three proxy variables, from the simple to the complicated, thereby making the research result more robust. Through the experimental test, the new conclusion is gained: the enterprises supported by the venture capital have no noticeable difference in the IPO under-price rate compared against those enterprises without the support of venture capitals. Among the sub-sample composed of the enterprises with the support of venture capitals, the reputation of the venture capitals doesn't have noticeable influence on the IPO under-pricing rate of the enterprises that the venture capitals hold shares. In the meantime, this paper for the first time conducts empirical analysis on the effect of the cancellation of the IPO lockup period of the enterprises whose partial shares are held by the venture capital.

Keywords: Reform of Enquiry System, IPO pricing system, Enquiry Object, Stochastic Frontier Analysis, Venture Capitals.