An optimal information extraction model and the efficiency of China's IPO pricing

The accuracy of pricing in initial public offering under book-building method is determined by the efficiency of the information extraction mechanism. This article discloses that mechanisms involving underpricing, discretionary allocation are key factors to enhance the efficiency of information extraction, through proposing a "truth-telling" model In China, mechanism of discretionary allocation is invalid owning to China's quantity restriction. Demonstrations about China's IPO book-building method discloses that during the first quotes it is relatively effective in information extraction, but it is not during the second quotes owning to the bidding behavior and the collusion of the institutional investors. According to the low efficiency of valuation of the stock and the collusion of institutional investors in China's book-building practice, we must strengthen the information extraction mechanism, standardize the process of the book-building, foster mature investors so as to promote the efficiency of the IPO pricing in China