Study On The IPO Abnormal Initial Return Based On Investor Sentiment In China's Stock Market

IPO abnormal initial return means the closing price on the first day is far higher than issuing price, investors who purchase the new share can obtain high earnings. Before the 1990's,the main point of view on the cause of IPO abnormal initial return is the deliberate low pricing of primary market, which is to compensate the risk of asymmetric information. Later on, with the development of behavioral finance theory, which induced a lot of arguments between traditional EMH and behavior finance theory, more scholars noticed that over evaluation on secondary market because of inefficient stock secondary market could also contributed to it.This paper systematically researches the stock price formation process on the fist trading day and the abnormal initial return based on investor sentiment.On theory aspect, it covered the international main point of view and considered the special characteristic of China stock market. Regarding to investor sentiment induce the over evaluation, we introduce one mathematic model to illustrate. There are rational and irrational investors (including optimistic investors and positive feedback investors) in this model. It successfully explains the over evaluation by describing investor behavior and the interaction among them. In additional, the model can also present the long run performance of IPO.On empirical aspect, the paper examines the China IPO market of 2006.6-2010.6. It analyzes the relationship between investor sentiment and IPO abnormal initial return by descriptive statistic and multiple factor regression. It is concluded that the closing bid prices on the first day of listed have a significant level of deviations from the company value, and the investor sentiment has a great impact on the IPO abnormal initial return,so I believe the IPO abnormal initial return on the first day listed mostly comes from over evaluation induced by investor sentiment.At the end of the paper, some suggestions on reducing IPO abnormal initial return are given.Meanwhile, it suggests the possible improvement for coming analyzers.