IPO Underpricing and the Evolutions of Regulations: Evidence from Chinese Stock Markets Presented by: Gang Wang (Steven) School of Accounting, Economics & Finance Faculty of Business & Law Deakin University, Australia Lb4 226, 221 Burwood Highway Burwood, VIC (3125)

Literature review CategoryhypothesisLiteratures Asymmetric information theory Winner’s curseRock (1986), Koh & Walter (1989) Information revelation Benveniste & spindt (1989), Loughran & Ritter (2002) Ex ante uncertaintyBeatty and Ritter (1986) SignallingWelch (1989), Allen & Faulhaber (1989) Principal-agent Baron (1982), Loughran & Ritter (2002) Institutional theorylawsuit avoidance Lowry & Shu (2002) Price stabilization Ruud (1993) tax advantage Rydqvist (1997) Control theoryRetain controlBrennan & Frank (1997) Lessen monitoring costStoughton & Zechner (1998) Behavioural theoryInformational cascadeWelch (1992), ProspectKahneman & Tversky, (1979), Loughran & Ritter (2002) Summary of underpricing theories

Cross-country underpricing (Ritter, 2006)

Institutional background  Definitive role of China Securities Regulatory Commission (CSRC) Issuance Review Committee (IRC)  High competition and uncertainty in getting approval from CSRC  Frequently varied laws and regulations/directories

Data  Data resource: principally from CSMAR database, some corrections according to SHSE & SZSE.  Number of observations: 1724 (891 listed in SHSE and 833 listed in SZSE).  Sample period: companies listed from 10 December, 1990 to 31 December, (their issue date has a longer span from 18 November 1984 through 21 December 2009)  IPOs (up to 70) in GEB (Growth Enterprise Board) were excluded from the sample.

Models  Variables in asymmetric information theories Ex ante uncertainty ---industry, firm risk (lngrsprc), pvp (par value to offer price), statecontrol, region Information revelation---bookbuilding  Variables in control theories—propsold  Variables related to issue policies---lagdays, placement, subperiod 1. Annual Percentage Yield (APY)----Winners Curse APY (Annual percentage yield)=underpricing*ballot*365/lagdays 2. Regression Model

Descriptive statistics statsunderprclngrsprcpvplagdayspropsoldbookbuildingregionstatecontrolplacement mean Median Max Min Sd skewness kurtosis N1724 underprclngrsprcpvplagdayspropsoldbookbuildingregionStatecontrolplacement underprc1 lngrsprc *1 Pvp0.7601*0.6207*1 lagdays0.6800*0.4893*0.7808*1 propsold0.1289* *0.0911*1 bookbuilding *0.3240*0.2528*0.1551* *1 region * * statecontrol * * * placement *0.2695*0.2217*0.1315* *0.7750*0.1361*0.2687*1

Yearly underpricing based on listing date Note: the line is composite index of SHSE 6124

Yearly underpricing based on issuing date  The trend of yearly underpricing is more obvious.  The relation between index and underpricing is more obvious

Underpricing of sub-periods 1.18/11/ /06/1994, 366 Obs (when the issuing of staff shares was banned). 2.01/07/ /04/2001, 739 Obs (when approval-system took the place of quota system). 3.23/04/ /05/2005, 287 Obs (when nontradable shares reform succeeded) 4.01/06/ /12/ Obs (all-tradable era)

Return of uninformed investors (APY) ObsMeanStd. Dev.MinMax overall

OLS Regression results (1)(2)(3)(4) VARIABLESunderprc lngrsprc-0.352***-0.404***-0.587***-0.422*** (-5.78)(-5.02)(-7.60)(-5.18) pvp11.390***11.219***11.145***11.453*** (11.29)(10.91)(9.96)(10.79) lagdays0.002*** (3.62)(3.64)(3.81)(3.62) propsold1.394**1.481** ** (2.12)(2.29)(1.04)(2.55) bookbuilding0.548***0.511*** (2.92)(2.74)(-1.17)(0.19) region0.740***0.719***0.730***0.776*** (4.86)(4.75)(4.13)(4.79) statecontrol-0.422**-0.413**-0.417**-0.395** (-2.45)(-2.41)(-2.43)(-2.23) placement (0.68)(0.83)(0.70)(0.17) Constant2.645***4.268***5.641***4.089*** (3.79)(2.73)(4.04)(2.59) industry dummynoyes year dummyno yesno sub-period dummyno yes Observations1,713 R-squared Robust t-statistics in parentheses *** p<0.01, ** p<0.05, * p<0.1

OLS Regression results by subperiod [1][2][3][4] VARIABLESunderprc lngrsprc ***-0.432***-0.337*** (-1.64)(-6.76)(-7.73)(-7.31) pvp14.689*** *** lagdays0.001** **0.009*** propsold *** * (-1.90) bookbuilding1.074**-0.680***0.408*** (-3.05)-3.73(-0.61) region3.066***0.243*** statecontrol ***0.114 (-0.83) placement **-0.471***0.046 (-0.44)-2.38(-3.41)-0.21 Constant ***4.498***5.410*** Observations R-squared Robust t-statistics in parentheses *** p<0.01, ** p<0.05, * p<0.1

1.The extremely high underpricing (655.40%) in first sub period comes from rulers and policies. For example, more than 50% of IPOs were issued at par value (around net asset per share), the par value to offer price in first sub-period is 0.495, while less than 0.2 in other 3 sub periods. More than 20% of IPOs issued shares to related people which need high underpricing to guarantee their profits. 2.The winner’s curse doesn’t apply in Chinese stock markets. The high yield of subscription results in huge demands and low ballot. 3.The private-owned companies have a much higher underpricing, %, than that of state-controlled companies, %. The fact reveals that the regulators and investors have less confidence on private-owned companies who have to pay more to buy entrance tickets. Main findings

4.The underpricing of companies in information-advantaged regions, %, is higher than that of companies in information-disadvantaged regions, %. It can be ascribed to home bias. 5.There is a positive relation between the proportion of sold share and underpricing, which seems to be consistent with control theory. However, It can be only interpreted by information asymmetric theory that the higher the proportion granted to issue, the better quality the issuer is. 6.The overall cash dividend is yuan per share per year, while the average issuing price is For issuers, the cash-out for possess capital from equity market is % per year. It can be easily understood that many companies are willing to go public and leave a large amount of money on the table. The issuers have behavioural bias that they are like to intake money and not to let it out. Main findings

Conclusion & Further study  The issuing policies in the earlier period are the principal determinant of extremely high underpricing.  The critical revolutions of policies result in obvious variation of IPO underpricing.  The underpricing is influenced by the prosperity of secondary market over the long haul. Except for the first sub-period (the highest underpricing), the underpricing of other three sub-periods are around 100%, which is still highest over the world. Traditional theories can’t explain it. The further study will focus on the secondary market and the co-action between primary market and secondary market.

Thank you for listening!