An evaluation of the impact of stock market reforms on IPO under-pricing in China: The certification role of underwriters

We examine how stock market reforms in China impact the certification role of underwriters in reducing substantial IPO under-pricing. In a broad strategy for economic growth, stock market development is seen as crucial but such is the scale of IPO under-pricing in China that it calls into question the continued growth in the period leading up to the turn of the century. Following the important 2001 IPO system reforms, however, underwriting activities grow and it is our contention that this facilitates the substantial growth in the stock market and wider economy thereafter. To show how and why underwriter activity is and continues to be important, we examine the experience of a near-population sample of Chinese IPOs over the period 1995 to 2007 using an approach that comparatively analyses the underwriting process pre- and post-reforms. In particular, we focus on underwriter reputation and, in this neglected area, discover that reputational impact is important when reforms open the listing process to ‘market’ solutions to increase both market liquidity and depth. We demonstrate that the outcome has been successful and which has important policy implications for stock market reform generally and IPO system reform specifically.