Han Xianwang: New Stock Pricing Dilemma, Winner's Curse

Recently, in the A share market, IPO pricing and post market share performance vividly deduce the The Winner 's Curse.

Due to the three month lock up period, the buyers who received the first tier market network eventually lost money due to excessive quotations.

The greedy mentality and abnormal game rules are the reasons behind this phenomenon.

The curse of the winner was first discovered in the auction market for oil and natural gas drilling rights.

In 1971, three people (Capen, Clapp and Campbell, 1971), such as Kai ban, formally discussed the new concept of the winner's curse in the oil technology magazine. It was found that after the Mexico Bay oil field auction, the winner eventually lost money or the actual income was much lower than expected, which also occurred in the background of the nominal price of oil rose from $3 to $35.

In the study of them and other scholars, it is found that the auctions of the auctions are very wide. The highest price is often several times the lowest price, or even several times the high price, and the bidders often do not show any characteristics of learning and summarizing experiences and lessons.

The severity of the winner's curse intensified as the number of tenderers increased.

Besides the auction of oil and natural gas drilling rights, the curse of winners often occurs in many fields such as mobile communication frequency auctions, new issue, contention for corporate control, online pay per click and so on.

According to the terminology of game theory, in a common knowledge auction with incomplete information, the winner usually pays too much for it. Curses are that the winning bid exceeds the value of the auction assets to lead to the loss of the winner, or the value of the assets being auctioned is lower than that of the auctioneer, although the winner is still profitable, but the net income is lower than expected.

Auction is one of the most important forms of price determination in the market economy. It has a long history. The main manifestation is that a seller faces many buyers. This kind of economic behavior is very representative.

The study of auction theory has undergone tremendous changes, but the rationality of auctioneers is still insurmountable.

You can keep all auctioneers rational at some point, and keep some auctioneers at all times rational, but you can't guarantee that all auctioneers will remain rational at all times.

In my view, although the A share market has been making progress in the IPO mode, there are some deep underlying reasons that can not be changed in the short term.

First of all, the road show is a mere formality, leaving regrets in haste.

In essence, IPO is a one-off auction based on public information. Investors who participate in auctions should evaluate and judge the value of the listed company.

The prospectus of these companies has provided preliminary information, but regulators and intermediaries are mainly responsible for the compliance and financial reliability of these information, and their growth can only rely on investors' own judgement.

But now the inquiry stage is very hasty and hasty. It seems to be going through the motions. Almost all the listed company managers can not have enough time to communicate with institutional investors. At most, they go to Beijing, Shanghai, Shenzhen and three to make large roadshows for three consecutive days. In a few hours, the introduction takes up more than a half, and finally they leave little time to answer several questions.

We introduced the form of roadshow, but in fact it is a form.

Many listed companies do not understand the double-edged sword of capital market and listing means a lot of outside financing. Many listed companies think that financing is easy to ignore investor relations.

The launch of the growth enterprise market and the expansion of the SME board make investors dizzy. It is very difficult to distinguish real value stocks in a very short time.

Second is the advantages and disadvantages of voting with capital strength.

The placement of new shares in the A share market is based on financial strength, just like the real estate business, regardless of whether you have a good future plan or whether you have good past performance, as long as there is capital and the price is high.

According to convention, the pricing of IPO should reserve some space for the two tier market, so as to ensure the enthusiasm of the investors in the new stock market, which is also the mass foundation for ensuring the pricing of new shares.

It is interesting to note that most of the most active participants in the IPO are conservative institutional investors such as bond funds, insurance companies, annuities and financial companies.

Because these investors are essentially risk tolerant and sensitive to absolute returns, they are generally keen on a relatively stable one or two level spread and frequently use large amounts of capital to fight new shares.

Before the pricing of IPO has not changed, there are more funds to fight new institutions.

The new share income is quite substantial for the bond fund, so these agencies have unintentionally raised the price of the new shares.

The success rate of new shares has been relatively low. Once a black swan event happens in China, such as China (601106) and Huatai Securities, it can only be broken.

In addition, when the small and medium enterprises board and the new mode of profit growth of the gem are continuously copied by the market, the IPO of small and medium-sized stocks is becoming more and more popular. Equity funds and balanced funds have also joined the team on a large scale, constantly raising the issue price of hot stocks.

Once the two level market is adjusted, the losses caused by breakage will be considerable because of the locking period.

There are more than one pattern of new stock inquiry, which is easy to result in the curse of the winner.

In order to ensure the success of the purchase, investors often report a higher purchase price than their own psychological price. When the number of investors participating in the inquiry exceeds 100, the result can be imagined.

Listed companies and intermediaries naturally master a large number of private information about company fundamentals.

In the rush of time, institutional investors simply can not study carefully, or give up.

This round of pricing of new shares has been bizarre: the Shanghai stock exchange's traditional big stock IPO has broken more; the IPO issuance price of the SME board and gem has been higher, and the break in the short term is still relatively small, but the recent breakage has begun to take place.

The three month lock period originally implies time risk. Theoretically, the one or two level spread is the risk premium.

However, once investors form the wrong expectation that asset prices will not rise, their demand for time risk compensation will decline.

In the cycle of the A share market, the inquiry price of new stock is increasing to frequent breakage, and finally reduced to no one's interest. It also reflects the fluctuation rule of the two level market, which has happened more than once.

The phenomenon of style assets appearing in the pricing of new shares is actually a mirror image of the actual situation of the two tier market.

Under the existing rules for the pricing of new shares, what we can do is to introduce investment discipline, strictly start from the fundamentals, balance the relationship between growth and valuation, and develop low profile growth stocks.