| Researches on the three commonly coexisting puzzles in IPO market, IPO's abnormal initial return(AIR),long run underperformance and hot issue market, are popular in the field of corporate finance in recent years. As the IPO market in China has a short history of less than twenty years, it would be interesting and meaningful to investigate its abnormal initial return phenomenon, which maintains at an extremely high level compared with the AIR in overseas developed market. In the past nearly sixty years'research, there are mainly two dominant theories, providing the explanations for this new issue puzzle, which can be clarified as underpricing and overvaluation. This paper analyzes the AIR in China based on previously relevant researches.By using a sample of 455 A-share IPOs during 2000 and 2007 in China market, the first contribution of this paper is to show that media coverage,market price prediction from institutional investors and past returns in recent new issues indeed contribute to explain the AIR in China from a new perspective. Irrational IPO investors form overly optimistic beliefs, which usually result in higher first-day closing price, in response to more media coverage and higher historical returns. Furthermore, given limits to arbitrage, sentiment should have a greater impact on prices of assets, consequently, the more various investors'opinion, the higher AIR.The second contribution of this paper is to apply the foreign theory, which is intended to explain the IPO puzzle in overseas market, to China's IPO market aiming at testing whether it also suits. In this part, according to the overvaluation theory four variables, turnover,consumer confidence index,B/M ratio and recent returns in secondary market, are examined. The result shows that they could well contribute to explain the new issue puzzle in China except the last variable, which is measured by the return of an investment in Shanghai Stock Index for 15 trade-days before the IPO date. In the investor sentiment theory, it is argued that high returns in secondary market would make investors form optimistic expectations or aggravate irrational sentiment, which then result in the AIR phenomenon. This argument proved to be not the case in China's IPO market, as there is no significant relationship between the hot in primary market and the performance in secondary market, in other words, it means the overly optimistic sentiment for IPO would not be affected by how the secondary market is going.In addition, considering on the unique formation and regulation features of the China's IPO market, a dummy variable is defined to test the impact that change in regulation may have on AIR. The result is statistically significant, but contrary to the anticipation, the adoption of a new issue method did not lower the AIR, which means the original aim of such change in regulation was not realized. This paper attempt to provide an explanation for this contradiction based on the overvaluation theory.The last contribution of this paper is to identify the effect of price revision on AIR and retest the three hypotheses in the former part, by using a sample of 106 A-share IPOs during 2005 and 2007. A dummy variable is defined to denote whether the offer price is upwards revised or downwards, which proved to be statistically significant and consequently indicate from which investors did get some information so that have an influence on AIR. However, contrary to investor sentiment theory, given that the average AIR of upwards price revising IPOs was lower than the other case, positive price revision could not be supposed to aggravate optimistic expectations of investors, and proved to be negatively related to AIR. |
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