INSTITUTIONAL INVESTOR HETEROGENEITY AND INITIAL PUBLIC OFFERING UNDERPRICING IN CHINA'S SCIENCE AND TECHNOLOGY INNOVATION BOARD: A REVIEW

Abstract

IPO underpricing in China's STAR Market has drawn substantial academic attention. As China's securities market develops and matures, institutional investors have emerged as crucial drivers of market efficiency. The STAR Market, which is specifically designed for tech-innovation firms that are in line with the national strategy, have achieved breakthroughs in core technologies, and enjoy high market recognition, differs from the A-share main board in terms of positioning and listing standards. These differences require investors to have stronger professional expertise and risk-management capabilities. Institutional investors, with their superior analytical ability and higher risk tolerance, play a pivotal role. The market-oriented trading mechanism of the STAR Market increasingly allocates shares to institutional investors through inquiry-based pricing. As a result, understanding how institutional investor heterogeneity impacts IPO underpricing has become a critical research question. This review integrates the literature on institutional investor classification in China, the factors contributing to IPO underpricing, particularly in the STAR Market, and the interaction among market efficiency, investor behavior, and underpricing. Finally, it examines how the diverse characteristics of institutional investors affect IPO underpricing based on inquiry pricing. This comprehensive literature review validates subsequent research findings, showing a positive correlation between the overall shareholding proportion of institutional investors and IPO underpricing. It also indicates that transaction-oriented institutional investors have a more significant impact on IPO underpricing than stable institutional investors.