Signalling and Price Discovery in Initial Public Offerings: Evidence From the Alteration of Pricing Mechanism in China

The purpose of this study is to investigate whether the market-driven reform in pricing mechanism of IPOs has improve the price discovery efficiency in China. Using a new dataset of 403 IPOs, from the perspective of signalling hypothesis and the market function of price discovery in the short term and long term, we find a significant positive relationship between the degree of underpricing in bookbuilding IPOs and the buy-and-hold risk discovered by the market in both the short term and the long term. However, there is no such evidence for non-bookbuilding IPOs. Additionally, the empirical evidence on signalling hypothesis is mixed. The market-driven reforms on pricing IPOs improve the market ability in both pricing and discovering the value of IPOs.