2010 NTUICF
Discussion on “IPO Underpricing and the
Evolutions of Regulations: Evidence from
Chinese Stock Markets” Gang Wang
Yenn-Ru Chen
National Cheng Kung University
1
2010 NTUICF2010 NTUICF
About this study
 This paper tends to investigate how the evolutions of
regulations impact the IPO underpricing.
 While underpricng phenomenon for IPO is well-documented in
existing literature, there is no convincing theory to explain the
extremely-high IPO underpricing in China.
 Since the economic and regulatory environment in China is
relatively different from the similar developing economies and even
developed economies, thus the common theories about IPO
underpricng developed based on the condition of well-developed
markets may not completely capture the major impact factors.
 Accordingly, a few of studies tend to focus on the regulation and
policy effects. However, prior studies mostly examine the specific
period, ignoring the impact of variation in relation.
2010 NTUICF
2
Theories of IPO underpricing
1. Information asymmetry theory
The level of underpricing increases with the information
uncertainty.
 winner’s curse uninformed investors cannot get any abnormal
return from IPO.
 book building effect underwriters exchange the underpring to the
reduction in the cost of bidding information via book building.
 signaling intention for succeeding equity shares
2. Institutional theory
 underpricing is a way to avoid the lawsuit or to obtain the price
stabilization or tax advantage.
3. Control theory
 the level of underpricing can facilitate the excess demand of
IPO and hence the ownership dispersion (Brennan and Frank,
1997).
2010 NTUICF
3
4. Behavioral theory
 the underpricing is derived from information cascade (Welch, 1992)
and prospect theory (Kahneman and Tversky, 1979). The former
theory suggests that investors rely more on other investors’ action
than their own information when making decisions. The other
argues that people concern more about the changes in their wealth
than the level of their wealth.
5. Policy effect
 According to the policy of China securities regulatory commission
(CSRC), the approval to go public is usually filled with competition,
time-consuming and uncertainty. Therefore, since longer time
period and higher uncertainty of IPO, the allocated investors may
have higher expectation. Accordingly, the level of underpricng
may positively relate to the time interval between offering and
listing.
2010 NTUICF
4
Hypotheses
 According to the theories above, this paper propose its
hypotheses as following:
 Information asymmetry theory:
 H1: Uninformed investors can’t get return more than riskless return.
 H2: There is no relation between IPO underpricing and size
(lngrsprc).
 H3: There is no relation between IPO underpricing and par to offer
price (pvp).
 H4: There is no relation between IPO underpricing and statecontrol.
 H5: There is no relation between IPO underpricing and region.
 H6: There is o relation between IPO underpricing andbookbuilding.
 Control theory:
 H7: There no relation between IPO underpricing and propsold.
 Policy effect:
 H8: There is no relation between IPO underpricing and lagdays.
2010 NTUICF
5
Major Findings
 By investigation through the whole period, the results
show that the extremely underpricing in China is
attributable to not only information asymmetry theory and
control theory, but also the impact of issuing policies.
 When looking into the sub-period samples, the results
vary with different samples, suggesting prior impacts may
vary with the variation of the regulation.
2010 NTUICF
7
What I like this study…
 This topic is interesting and has bright potential.
 The author provides readers with a clear picture on the
institutional background and the development of issuing
regulation in China.
 The theories about IPO underpricing are well reviewed.
All good paper can still be improved.
2010 NTUICF
8
Comments
1. While the paper seems intent on the attribution of the
variation in regulation to the extremely underpricng in
China, however, the study only focuses on the
reexamination of existing theory and the policy effect. It is
not clear how the revolution of regulation in China affects
its capital market activities.
 Even though this paper examines the impact factors of underpricng
under different time intervals, the author does not demonstrate how
the change of policy affects underpricng phenomenon in capital
market and further change the major determinants of the
underpricing.
 Should be the underpricing phenomenon more or less in different
subsample period?
2010 NTUICF
9
Comments
2. The author describes the regulation evolutions in Chinese
stock markets, but the detailed changes in behaviors of
firms, investors, and regulators are not discussed.
 While it is reasonable to expect that the changes of regulations
would influence the IPO practice and underpricing, it is not clear
how those changes affect the practice and how the related parties
response to such changes.
 It is likely that those changes in behaviors and the interactions
between firms, investors, and regulators, indeed are the core
determinants of the IPO underpricing.
3. The hypotheses in this study are in fact the predictions to
explanatory variables. The main argument in this study is
that the revolution of issuing regulations is critical to the
variation of IPO underpricing. The development of
hypothesis should thus be in line with the argument.
2010 NTUICF
10
Comments
4. How is this paper comparable to the literature in IPO
underpricing?
 Given there is a number of studies to focus on the extremely
undperpricng in China and the author argues that prior studies all
examine the specific time period, the author may summarize a
table of prior finding and time interval about China IPO research.
From the summary, we can not only clearly compare your
argument with prior finding, but also highlight the difference and
contribution of this paper.
5. The author should consider to provide sufficient citations in
defining explanatory variables and predicting their effects.
2010 NTUICF
11
Comments
6. Some interpretations in the paper seem confusing.
 For example, how can we infer that the theories widely accepted in
developed economies cannot be applied to the Chinese stock
market just because of its highest underpricing around the world?
 Moreover, according to the result of table 5, how can we attribute
the negative impact of market region on underpricing to home bias
without further data information or robustness check?
 The structure of this paper can be improved better.
Specifically, the relationship between literature,
hypotheses, and research designs should be strongly
linked.
2010 NTUICF
12