Influences of Different Underwriting Mechanisms on Offering Prices and the Case of China

  •  Fangliang Huang    
  •  Zuoling Nie    


There seem to be little discussions on the influences of different underwriting mechanisms on offering prices. Under
different underwriting mechanisms, the issuer, the investment bank and the investor will consider the offering prices based
on his own benefit. As a result, the offering price is affected by different underwriting mechanisms. In China, most of the
stock IPO takes the form of stand-by underwriting. Because of the huge demand on the new share issue from Chinese
investors, the investment bank almost has not unsold stocks to underwrite. Therefore, there is no big difference in the risk
that the investment bank faces between the firm commitment underwriting and best-effort underwriting. As a result, when
the Chinese investment bank is allowed to participate in the procedure of pricing offering price, the pricing behavior of the
investment bank has no big difference in the two risk- similar mechanisms. Considering different advantage and suitability
of different mechanisms, China needs to change the single underwriting mechanism situation and encourage the practice of
the firm commitment underwriting mechanism.

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