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Corporate Governance and IPO underpricing

Author: LeiĦĦJie From: www.yourpaper.net Posted: 2009-03-30 23:06:25 Read:
[Abstract] corporate governance structure is an important means of information of listed companies to investors the value of the company, investors in corporate governance structure is expected to be reflected in the IPO pricing process. Good corporate governance structure will help reduce the agency costs of the company, thereby reducing the IPO underpricing in the release process, reduce the company's cost of equity financing, this paper were analyzed.
[Key words] corporate governance IPO

In just ten years, China's stock market has been developing rapidly. As of June 30, 2005, the total number of listed companies has increased from the initial 13 to 1478, total market capitalization of more than one trillion yuan; investor accounts increased year by year, the stock market has become an important integral part of China's national economy component. The stock primary market (also known as the issue of market or IPO market) is an important part of the stock market, an efficient and orderly primary market from the source to ensure the quality of listed companies, the healthy development of the primary market is the entire stock market the healthy operation of the foundation.
Initial public offering of shares in the primary market (Initial Public Offerings, IPO), the company to raise funds in the investment bank to assist the first time Public Offer Shares to the majority of investors in the stock market, and then the Securities and Exchange the Exchange.

Underpricing contrary to the efficient market hypothesis

From the 1970s onwards, the IPO market three anomalies much scholars are concerned about: the short-term underpricing (short-run underpricing), the long-term weakness (long-run underperformance), as well as the issue of peak period (hot issue market). IPO underpricing is less than the issue price of new shares in the primary market transaction price in the secondary market, the performance of IPO price significantly lower than the first day of trading after the IPO's closing price, the resulting higher than the market or industry average return on excess returns. According to the efficient market hypothesis, the efficient market conditions, the IPO issue price of its listed trading price in the secondary market there is no risk-free return, net of risk premium and the cost of purchase, the price should be in the secondary market after listing its transaction prices close to. The underpricing is clearly contrary to the efficient market hypothesis, theorists propose various hypotheses fact in the stock market have greater access underpricing is considered to be the "mystery" of modern financial research. The high initial rate of return of the new shares is a distinctive feature of China's A-share market, associated with it, the phenomenon of the huge amount of new shares subscription funds, a very low success rate, IPO on the first day of the high turnover rate makes our secondary market highly unbalanced situation, greatly reducing the efficiency of the operation of the market and the allocation of resources, but also contains the potential financial risks. According to Jay R.Ritter (1995) data show that, on average, the stock of developed countries and regions for the first time public offering underpricing of about 15%, while the emerging markets in developing countries underpricing the extent of about 45%, which is the highest in China, up to 388%.

Second, corporate governance is an important way to enhance corporate value

Many problems need to be addressed prior to the listing of a company, corporate governance, executives, accounting, auditing, regulations, and many other practical factors will change. Corporate governance mechanism is considered to be the integrity of the principles of modern operating effective corporate governance is deemed to safeguard the assets of the company, basic measures to maintain and strengthen investor confidence. Corporate governance issues have been the focus of attention of academia, industry and regulators, mainly because there is a close relationship between corporate governance and firm value.
Practice shows that: good corporate governance structure is conducive to improve the company's results of operations, reduce operating costs, enhance corporate value. The company's operational efficiency, reduction in the company's internal agency costs are the total cost of the company towards minimize goal. The same time, good corporate governance structure is conducive to attracting long-term stability of the external capital to inject vitality of growth for the company. Most scholars believe that good corporate governance mechanisms can effectively balance the balance of interests of the shareholders as the core of many stakeholders, and thus help to reduce agency costs, and ultimately to ensure that the interests of investors. Corporate governance, capital providers have to solve is how to ensure that they can get a return on investment way, its fundamental purpose is to ensure that the interests of capital providers (including shareholders and creditors). External governance mechanism only in a state of crisis in order to effectively play a role, and the day-to-day operations of the company depends largely on the efficiency of internal governance mechanisms, internal governance mechanism is an important reason for the poor performance of the company, thus increasing the efficiency of the internal governance mechanisms can help Increase the value of the company. Holmstorm and Tirole (1997) moral hazard model to analyze the interests of shareholders, that good governance structures help to reduce agency costs. The Aghion and Boloton, (1992) from the point of view of the right to control the analysis that a good allocation of control over corporate governance also helps to lower agency costs and the value of the company. Levy (1983), who found that the correlation between the U.S. company's share price and shareholding structure.
Principal and agent before signing the contract due to asymmetric information, the agent in the transaction always tend to be made in their favor to the detriment of the choice of the principal, the principal in unknowingly case, only paid at an average price This is the problem of adverse selection. If the agent of their personal information can be passed to the client, the client based on this information to make a choice, this is the signal transduction, the resulting signal theory based on asymmetric information. Signal theory suggests that corporate insiders generally higher than outside investors to acquire more information on the Company's operations and prospects. In the case of asymmetric information, investors are difficult to objectively distinguish high and low quality, they usually underestimate the company's stock. Managers of high-quality companies are always trying to use various means of signal transfer enterprise value information to investors, and good governance structure is undoubtedly an important signal of one of the means listed companies to give the market value information. In the IPO process, outside investors are most concerned about their return on investment, good corporate governance mechanism to ensure that the interests of investors and enhance their confidence, which will undoubtedly improve the investors on the company's investment is expected. Certo also believes that corporate governance structure with two conditions: the useful signal can be observed and difficult to imitate.

Third, the conclusion

As an important way for enterprises to enhance the value of corporate governance must be more and more investors attention. Internationally renowned consulting firm McKinsey published in 2001 an investor intentions report showed that: 75% of investors in the choice of investment objects, corporate governance, the company's financial indicators; 80% of investors said they are willing to a higher price to buy the company's stock of good corporate governance; than 60% of investors believe that corporate governance considerations can make them better to avoid investment risks. In the course of the IPO, the issuer good governance structure is undoubtedly important good information is passed to outside investors, the ability of return is made by the issuer to the investor confidence commitments. Investors decide to buy IPO shares will estimate the Company's internal control potential agent behavior and its economic consequences, if the company's internal governance mechanisms can effectively bind internal agent behavior, reduce agency costs, investors no doubt, would a higher The purchase price of the company's stock, reduce IPO underpricing. Conversely, if the company's internal control system can not effectively constrained the internal agent behavior, including over-the-job consumption and asset dig (tunneling), investors will be asked at a lower issue price to compensate for the possible future loss of value of the company .
Based on the above analysis, corporate governance structure has a direct impact on investors willing to pay the price of the shares of listed companies, thereby affecting IPO underpricing. IPO process is actually the enterprises to improve corporate governance plays an important role in the improvement of the corporate governance structure for reducing IPO underpricing, to reduce the cost of equity financing.

[1] Chen Gong Meng Gao Ning: China's stock a market underpricing the extent and causes [J]. Financial Research, 2000 (8).
[2] in the East Chi: Board of Directors, Corporate Governance and Performance [J]. Social Sciences in China, 2003 (3).
[3] Wei Yunfang: Corporate Governance in the IPO process [J] Board, 2005 (7).
[4] Certo, ST, CMDaily, and DRDalton: Signaling firm value through board structure: An investigation of initial public offerings [J]. Entrepreneurship Theory and practice, 2001 (26).
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