Research On Investor Sentiment And The IPO Discount Puzzle

The IPO discount puzzle is one of the puzzles about IPO issue. It has drawn much attention from financial economists and investment bankers. During the decades since it was raised, many hypotheses have been put forward. However, they are still different from what is happening in real stock markets. In recent years, the behavioral finance has developed greatly. And the theory has been utilized to study the IPO issue. Investor sentiment has been an important path to explain the IPO discount puzzle.DSSW(1990b),LST(1991), DHS(1998), BSV(1998), HS(1999), BSW(2002) are six models to describe the influence of investor sentiments on assets pricing. Based on them, Ljungqvist, Nanda and Singh put forward LNS (2003) model; Derrien put forward Derrien (2004) model. LNS model documents that IPO discount is the result of underwriters trying to extract the surplus from over-optimistic individual investors and maximize their proceeds. The optimal strategy requires rational investors be allocated the new issues at a discount and then resell them to exuberant individual investors after going public. The discount of IPO is to compensate the risk institutional investors are facing because they control the supply of the new issues in the second markets and the hot market may come to an end at any time. Derrien model documents that the offering price decided by underwriters depends on the intrinsic value revealed by institutional investors and noise trader sentiments. The higher noise trader sentiments, the higher the offering price. But the information about noise traders sentiments in only partially incorporated into the offering price because the underwriters have to consider the price performance in the second markets after going public. If the price falls below the offering price, the underwriters are obliged to provide price support. So the offering price is the trade-off between underwriting fee and price supporting cost.This paper systematically introduces LNS model and Derrien model and makes an empirical research on the relation between investor sentiments and the IPO discount puzzle in China stock markets. We find that many sentiment investor s exist .A further step, we analyze the information resources of investor sentiments and find that industry character is the most important, while the influence of the market return preceding the offering is not obvious. At last we conclude it is important to cultivate institutional investors and advocate rationally investing.