A Study on the Relationship between IPO Underpricing and Aftermarket Liquidity
|School||Nanjing University of Aeronautics and Astronautics|
|Keywords||IPO underpricing aftermarket liquidity ownership structure asymmetric Information|
IPO Underpricing is a common phenomenon in the global capital markets, whether in emergingsecurities markets of developing countries, or in develped countries’ maturity securities marketswhich are almost effective. China’s stock market has a high level of IPO underpricing rate since itsinception. Too high IPO underpricing not only brings various practical problems, such as cause theshock of the secondary market, bring about the disorderly flow of huge amounts of money, intensifythe contradiction between market participants, the market is flooded with speculative atmosphere,butalso fundamentally impede the play of resource allocation function of the capital market. Theoreticaland empirical studies on IPO underpricing have been relatively mature in foreign countries. Manyscholars explored reasons of IPO underpricing from various angles and made correspondingcountermeasures, but they are all based on mature markets. China is a typical emerging capital market.The market mechanism is not perfect; the development of the institutional investors is not yet ripe;and there are also a lot of restrictions about the liquidity of the capital markets. Therefore whetherthese foreign theories can be applied to China remains to be verified."Promoting Liquidity Hypothesis" put forward by Booth and Chua (1996) and "IlliquidityCompensation Hypothesis" raised by Ellul and Pagano (2006) are hypothesiss to explain IPOunderpricing from two opposing point of view. The former believe that IPO underpricing lead todispersed ownership which promotes aftermarket liquidity. IPO underpricing is the cause, andaftermarket liquidity is the result; the latter point that IPO underpricing is the compensation ofilliquidity and liquidity risk result from information asymmetry in the aftermarket.In this case,illiquid is the cause, IPO underpricing is the result. Subsequently, many foreign scholars useddifferent samples to test these two hypotheses, but did not reach a unified conclusion. Two verydifferent conclusions give rise to confusion, and it also deserve constantly further discuss.On the basis of summarizing domestic and overseas research status, this paper analyses thetheory mechanism of these two hypotheses, and then select the high frequency trading data of the IPOcompany listed on the Shanghai and Shenzhen Stock Exchange in China in2006-2011.At last it usescross-sectional multivariate regression to empirically test the applicability of these two hypothesestest in China. The main conclusions in this paper are the following three points:(1)"Promoting Liquidity Hypothesis" does not hold in Chinese market. IPO underpricing willnot promote dispersed ownership, but dispersed ownership will raise the level of liquidity. In addition, under the premise of a controlling shareholding structure, IPO underpricing doesn’t promote liquidity,on the contrary, underpricing rate is negative correlated with the liquidity level, that is, the greater thedegree of IPO underpricing the lower the level of aftermarket liquidity.(2)"Illiquidity Compensation Hypothesis" partly applies the Chinese market."AsymmetricInformation theory" which is widely popular abroad does not explain China’s high IPO underpricingphenomenon. In China, IPO underpricing is the compensation of aftermarket illiquidity and liquidityrisk, but this illiquidity is not caused by information asymmetry.(3) Stock price, trading volume, market value, earnings volatility are important factors affectingliquidity; company size is positively correlated with ownership structure, but the company age has nosignificant impact on the shareholding structure; company size, company age, proportion of liquidityshares in IPO, are all significantly positively related to underpricing, the success rate of IPO hassignificant negative correlation with underpricing. The relationship between underwriter reputationand IPO underpricing is less significant.