Research On IPO Industry Effect Of Three-factor Model

In the past two decades, with the economic development the China's securities market has had continuous progress, growing scale and improved system. Securities' business institutions and investors continue to mature and securities market has become an integral part of China's economic. However, empirical researches show that stock market does not reach efficient market, and there is possibility to acquire abnormal returns. This paper calls that the IPO of a company makes others stocks in the same industry get abnormal returns as "IPO Industry Effect". Although people have paid attention to this phenomenon, but there is little theoretical research related to it and more researchers think it as the phenomenon of stock speculation. Wang Yanming, Chu Qingfeng (2009) have studied this phenomena using the traditional CAPM of single factor model and the results show that the observed excess return data caused by the "IPO industry effect" is quite large. The results need further empirical testing because of the shortcomings of CAPM model, and this paper uses Fama-French three-factor model to study industry effects owing to the IPO of a company, not only expands the meaning of theory, but also improves the practical value of the three-factor model in the domestic stock market.Wang Yanming, Chu Qingfeng (2009) concluded that they observed obvious positive abnormal returns between 1996 and 2007. But this paper's conclusion is different with previous scholar's conclusion. Based on Shanghai a-share industries weekly return between January 1998 and December 2009, the paper apply Fama-French three factors model to multi-element linear regression. We have verified the obvious IPO industry effect:From 1998 to 2009 each year's the mean value of abnormal returns fluctuates greatly, the year's mean value is greater than zero except for 1999,2003,2004. That is, IPO events make industry's stock portfolio produced positive excess returns, and the excess returns are obvious between 2006 and 2009.We can find that IPO industry effect is obviously positive year in bull market and IPO industry effect smaller or negative in bear market. From 1998 to 2005 the negative IPO effects were caused by the secondary market liquidity impact, and from 2006 to 2009 years the bull market leads to significant positive IPO effect because of strong market confidence.Further empirical research shows that the new stock's relative size, the other same industry IPO stocks'relative size in a short period before this IPO and the overall market activeness is the factors which affect the IPO industry effects and the relationship between three factor and the effect is positive. In other words, the bigger size of the IPO relative scale leads to the more significant effect of IPO industry, and the more other stocks'IPO within the same prior causes the greater effect of IPO industry, and the effect of industry in Bull market is more obvious than the effect in Bear market. By observing the regression coefficients of model we can find:the relative size of IPO has the most influential on abnormal returns, the bull market or bear market has the secondary influential and short-term the total IPO relative size' influence is the last.The study of IPO industry effect is empirical analysis of obtaining stock market excess profits. The research may lead the investors'behavior, provide active investors with investment goal and provide passive investors with the reference standard. If there is the phenomenon of abnormal returns in the stock market, the investors can get abnormal returns in accordance with a certain principle. If the market is effective, the investors will not get the chance to obtain abnormal returns and it also denied active investment management.China's stock market is not mature and will face a constant adjustment process. The stock market characteristics and the volatility of the stock price are also constantly changing. We should pay close attention to the characteristics of different period of our country stock market in order to make the suggestions and measures helping securities market development. Regulators should help the investors understand market, recognize rule, enhance the self-protection ability through investor education, in order to promote rational investment strategy. Improving operation efficiency, enhancing investors' confidence and protecting the rights and interests of investors will lead to healthy securities market and steady society.