Study On Investor Sentiment And The Role Of Sentiment In IPO Underpricing

A systematic increase from the offer price to the first-day closing price has been documented for initial public offerings, this phenomenon is usually called IPO underpricing. A range of theoretical explanations, which are not mutually exclusive, has been advanced to explain why owners of a company would rationally sell shares to outsiders for less than the apparent maximum price achievable.Based on the theory of behavior finance, this paper has constructed a measure system for investor sentiment which includes financial measures and survey measures, where financial measures are closed-end fund discount, initial turnover rate and market-to-book ratio, survey measures are consumer expectation index and CCTV board index. And we empirically examine the effect of investor sentiment on IPO underpricing using a large IPO dataset.With the IPO dataset covering the period 1999-2007 and containing all initial listings of A stock on the Stock Exchange in China, this paper has important findings on the following two aspects: First, when we examine the effect of investor sentiment on IPO underpricing, we constructed a measure system for investor sentiment which includes financial measures and survey measures, we use a very large dataset(divided into two stages), we compare the effects from investor sentiment with those from asymmetrically distributed information and institutional background of Chinese security market, and we find that the investor sentiment has a more significant impact on IPO underpricing; Second, we empirically analyzed the different performances of financial measures and survey measures when we use them to explain IPO underpricing, we show that financial measures play better than survey measures.