Unswervingly promoting marketization process is at the core of IPO system reform and among the three aspects of work indispensable to improved validity of IPO pricing, an interest conflict avoidance mechanism among all market participants is quite necessary, said President Zhang Yujun of the Shanghai Stock Exchange on April 8.
In Zhang's opinion, market participants' professionalism in valuation and pricing needs all-around improvement. In the current process of IPO pricing, some price inquirers and sponsors give quotations at will on the basis of their seemingly broad yet superficial risk analyses. It is understandable that underwriters, as sellers, tend to set prices at a high level, while it doesn't make sense that some fund firms, as buyers, claim on various occasions that the P/E ratios of 80 and 100 are not high. All this indicates that there is still lots of improvement space for price inquirers in terms of professionalism and awareness of self-protection. Thus, enhancing professionalism in valuation is definitely a crucial facet in improving pricing validity.
In the second place, it is necessary for various market participants to establish the interest conflict avoidance mechanism as without it, sellers are liable to over-praise the to-be-listed companies and fund firms, as buyers, may be careless with their quotes. "This phenomenon is irrational. I believe the establishment and perfection of interest conflict avoidance mechanism are quite necessary for investment banks and sponsors." Zhang stressed that, "Only with an effective market restraint mechanism, can intermediaries conduct due diligence and be honest and trustworthy. Otherwise, the cursory pricing by sponsors and price inquirers may lead to the hot-headed acceptance by investors."
In further analysis, education for rational, professional, mature and self-disciplinary investor will still be a key to guiding market valuation to rationality. "The market is built on its investors. If the investors on the market are blind and not equipped with professional knowledge, it is meaningless to discuss the pricing." Zhang holds that only intermediaries and market participants grow to be more professional, rational and mature, can the market valuation strides in the right direction.
As to the issues of "high issuance price, high P/E ratios and excessive funds raising" as well as "closing prices' drop below issuance prices on the first trading day", Zhang said that these phenomena are not only signs of market improvement but also important aspects requiring further improvement in the future. "The number of companies whose closing stock prices fell below their issuance prices on the first trading day is less than the expected, yet reflecting the functioning of the market."
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President Zhang Yujun, Shanghai Stock Exchange: Improved Quotation Validity Calls For Interest Conflict Avoidance Mechanism
Date 11/04/2011