tailieunhanh - Efficiency of IPO pricing mechanisms: Comparison of book building and fixed price methods in China

This paper compared the efficiency of IPO pricing mechanisms namely Fixed Price (FP) and Book-Building (BB) in China by analyzing IPOs' underpricing level. Findings include the FP regime was more efficient than the BB one because the BB did not reduce the underpricing level in China as expected,. and other contents. | JOURNAL OF SCIENCE, Hue University, Vol. 70, No 1 (2012) pp. 121-132 EFFICIENCY OF IPO PRICING MECHANISMS: COMPARISON OF BOOK-BUILDING AND FIXED PRICE METHODS IN CHINA Ho Tu Linh1, Wang Yixia2, Nguyen Dinh Chien2 1 2 College of Economics, Hue University, Vietnam School of Management, Huazhong University of Science and Technology, China Abstract. This paper compared the efficiency of IPO pricing mechanisms namely Fixed Price (FP) and Book-Building (BB) in China by analyzing IPOs' underpricing level. Findings include (1) the FP regime was more efficient than the BB one because the BB did not reduce the underpricing level in China as expected; and (2) reasons for this were (i) information transparency of the BB has not reduced other external effects, for example, impacts of some firm quality and exante uncertainty proxies were still tight or even stronger since 2005; and (ii) investors were optimistic toward market conditions as higher quality underwriters invited in the BB procedure as well as the fact that underwriters often lowered offer price after collecting information from the BB process, which made the underpricing level rise. Keywords: IPOs, Fixed Price, Book-Building, underpricing. 1. Introduction Initial Public Offerings (IPOs) are priced by distinct mechanisms in different nations. Before 1990, Auction and Fixed Price (FP) were commonly adopted. In the recent two decades, Book-Building (BB) and its hybrids have nearly become dominant all over the world (Jagannathan et al., 2010). Different IPO pricing mechanisms have different efficiency levels of underpricing. Kucukkocaoglu and Sezgin (2007) found some mixed results supporting this point. BB was considered as the most effective method because it resulted in more efficient pricing for sellers compared to FP and Auctions almost half of the studies listed in their research. The underpricing phenomenon in Chinese stock market has been studied since the 1990s. The dramatic high level of IPOs underpricing