Study On Noise Traders And The Real Initial Returns Of Initial Public Offerings In China

IPO's abnormal initial return has been one of the hot issues paid much attention to by financial academic and industry. But it cannot represent the real initial return of the investors for the IPO initial return (IR) calculated by the comparative difference between the first close price and the offer price of the new stock as usual, because the real initial return is also related to the lottery rate. This paper researches the forming process of IPO real initial return (RIR) based on the noise trader factor and behavioral finance. In primary markets, too many noise traders make the quantity arbitrage inefficient, and reduce the real return, while on the first trading day, strict short sale constraint and the noise traders' psychology of begrudged sale make the price arbitrage inefficient, and too many noise traders make the new stock overvalued and improve the real return. Whether the RIR is abnormal, depends on the final result of the two different effects. Moreover, this paper also researches the influence factors of the offer price and the IR (calculated as the comparative difference between the first close price and the offer price as usual).Using a sample of 583 A-share IPOs during 1998-2007, we find that the RIR in our country is a little more than risk-free return, and much less than the average market return, which means that the RIR may be in the reasonable interval. But it does not declare that there is no anomaly during the IPO processes form the primary market to the secondary market.This paper classifies the investors in the primary market to arbitragers and noise traders, and builds a supply-demand analyzing model, then finds that there is no positive but only negative abnormal return in the primary market for too low lottery rate or too high offer price, especially when there are too many noise traders. Using a sample of A-share IPOs during 1998-2007, we find that the demand of the new stock in the primary market is significantly positive correlated with the recent IPO performance on the first trading day, which proves the existing of the noise traders in the primary market, and the existing of the noise traders can improve the offer price indirectly. According to the formula of RIR, noise traders' positive effects on the demand of new stocks and the offer price can reduce the RIR and bring the negative abnormal return.The strict short sale constraint and the noise traders' psychology of begrudged sale badly limit the short position on the first trading day, so superfluous noise traders (including sentiment investors and positive feedback traders) would push the first closing price far up, which results in the positive abnormal return. Using a sample of A-share IPOs during 1998-2007, we find that the two kinds of noise traders both are significantly positive correlated with the first closing price, the IR and the RIR, but the factors of asymmetric information, which has been seemed as so important in the past, have weak explanation ability of IR. It indicates that the noise traders in the first trading day is the real main factor of the high comparative difference between the first close price and the offer price of the new stock in our country.The RIR is related with not only the pricing efficiency in primary markets and secondary markets, but also the efficiency of capital allocation in primary markets. The positive feedback characteristic of noise traders would lead to the vicious circle of IPO market efficiency. To improve the market efficiency, we can't just focus on the IPO pricing efficiency in primary and secondary markets, and we need pay more attention to the superfluous inefficient money in the primary market, which can't be used for firms' real investment.