"We want a comprehensive agreement for all essential issues, mechanisms for implementation, a timetable for implementation, and guarantees".
Fig. 2 Relation between IPO underpricing and V 1, V 2 under different issuing mechanism.
Under the fixed-price issuing mechanism, the issuing price excludes any private investor information; hence, all investors only have their own private information in the first period.
The issuing mechanism of bookbuilding offers a much higher IPO pricing coefficient than that of fixed-price on the condition that non-homogenous expectations among investors remain unchanged.
Under the fixed-price issuing mechanism, the IPO underpricing is ( frac{{sigma_1}^2overline{E}(U }{2overline{E}(U -rho {sigma_1}^2}+frac{2left({V}_2-{V}_1right)}{2overline{E}(U -rho {sigma_1}^2} ).
The fourth paper, "Heterogeneous expectations, IPO Underpricing and issuing mechanism", Xiao-cheng Zhang, Miaomiao Zhang, Shao-an Huang, and Yongsheng Zhou, builds the Initial public offering (IPO) pricing and underpricing models with investors' heterogeneity based on different issuing mechanisms and provide a comparative analysis.
According to (4), we can conclude that under the issuing mechanism of bookbuilding, a monotone, increasing linear corresponding relation exists between the IPO issuing price and institutional investor private information ( {displaystyle {sum}_{i=1}^n{s}_i} ).
Hence, when the issuing mechanism of bookbuilding is adopted in China, only by decreasing non-homogenous expectations among institutional investors can real marketization of bookbuilding be given full play, further lowering IPO high-underpricing.
Conclusion two indicates, under either issuing mechanism, IPO high underpricing is not only caused by intentional underpricing of the issuer and institution but also by unintentional underpricing from investor heterogeneity.
Under the fixed-price issuing mechanism, since the issuer cannot determine the effective purchase demand, generally, the issuer will formulate the issuing price in strict accordance with the principle of expected utility maximization based on the determination of a risk aversion coefficient.
