The IPO Underpricing Impact Analysis of Split Share Structure Reform in China
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When all the stocks are circulating in a hot market, Ljungqvist, Nanda, Singh(2003)(referred to as LNS model) first researched the IPO underpricing based on investor sentiment and proved that the optimal decision of underwriter is to oer stocks by many times. IPO underpricing is to compensate for the risk that the hot market will end too early. Combining LNS model with the split share structure in China, this paper researches the impact of split share structure on IPO underpricing, and poses a systematic theoretical model and proves the rationality of theoretical model through analysis of empirical. First, we analyze the case that the issuer sells IPO stock directly (direct selling) based on split share structure. The issuer is best to oer shares with many times to get a higher profit. Second, we also analyze the case that the issue chooses underwriter to sell IPO stock (underwriting) when the stock market exists split share structure. This case is divided into two cases: the underwriter has no non-tradable shares or has some non-tradable shares. The underwriter is also best to oer shares with many times. Compute the models of IPO underpricing of the two cases with maximum profit of the issuer and underwriter’s participation constraint. Through the models, we can see that the reform of split share structure does reduce the size of IPO underpricing with some requirements on the price and quantity of non-tradable shares. This also promotes Chinese stock market to further developing and mature.
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