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

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