Does Underwriter Reputation Promote Fair Pricing Behavior In The IPO Process? Evidence From ChiNext-Listed Firms

Abstract

Motivated by the observation of three long-existing phenomena in the ChiNext market which are high issuing prices, high price-earnings ratios, and strikingly high capital raised in IPOs this study empirically examines whether underwriters reflect fair attitudes toward, and treatment of, different stakeholders through accurate pricing and whether the attitude varies with different underwriter reputations. We do this by investigating whether the extent of underpricing is significantly reduced by underwriter reputation. We find that the role of underwriter reputation as a mechanism of disciplining opportunistic behavior and as a third-party certification is muted. Although underwriter reputation is still highly correlated with offering price, underwriter reputation doesnt lower underpricing effectively. Underwriters simply take advantage of their reputation for their selfish interests, which unethically damages stock investment returns, especially for the small and middle shareholders. We conclude that underwriters do not exhibit good business ethics to promote fair pricing in ChiNext IPOs.

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