2010 NTUICF2010 NTUICF NTUICF Discussion on “IPO Underpricing and the Evolutions of Regulations: Evidence from Chinese Stock Markets” Gang Wang Yenn-Ru Chen National Cheng Kung University

2010 NTUICF 2 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 3 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 4 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 5 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 6 Data and Model Data. In order to examine the impact of the change of regulation, the data of this paper include the listed companies during the period of 1990 to Model. Based on the existing theories, this paper tends to examine the determinants of IPO underpricing via the information asymmetry theory, control theory and the policy effect. The study applies the following equations to testify their hypotheses. Model (1) is applied to the examination of H1, and the Model (2) is to examine the remaining hypotheses. APY (Annual percentage yield) = nderpricing*ballot*365/lagdays ………(1) Underpricing = β0+β1lngrsprc+β2pvp+β3lagdays+β4propsold +β5 bookbuilding +β6region +β7statecontrol +β8placement +β9industry+β10subperiod +β11year+ε ………(2)

2010 NTUICF 7 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 8 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 9 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 10 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 11 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 12 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.