Investor Sentiment And IPO Underpricing

In recent years, China's stock market sustained strong growth driven by robust growth in the domestic economy, accompanied with the vigorous development of the securities IPO market. However, a long-term high rates of underpricing phenomenon in IPO market since the establishment of the stock market is not as improved as the IPO market has been booming.IPO underpricing refers to the phenomenon that in the process of IPO, stock listed on the first day closing price is higher than its issue price,that is, an issue price below the market price listed on the secondary market, usually use underpricing rate to measure the level of underpricing. Underpricing rate refers to the phenomenon that in the initial public offering on the first day closing price is higher than its issue price, you can use (closing price-the issue price)/issue price expressed. While the underpricing rate is higher, issuing new shares is priced lower,with the amount of raising funds less; underpricing rate is lower, the higher the IPO pricing.Although this allows the issuer to raise funds as well as the amount of underwriting income increased.However, when the underpricing rate is less than 0, it means that the closing price is below the offering price on the first day of IPO shares listed,that is, pricing is too high. Therefore, the ideal issue price should be the highest one that investors are able to tolerate, that is, the underpricing rate is 0.IPO underpricing refers to the underpricing phenomenon that the rate is greater than 0. As we all know, IPO underpricing exists in a variety of markets all over the world, whether it is mature or emerging securities markets, regardless of issuance mechanism in which,the difference is only the rate. The fact, that the long-term existance of underpricing phenomenon is difficult to be interpreted reasonably by the traditional theory of finance,has attracted many scholars,with theories formed complicated. A formal academic study of IPO underpricing began at the start of "Financial Economics" published the article "the price of newly issued shares of public performance",writen by Roger G Ibbotson,which shows that in the United States 120 new shares listed in 1960-1969,with their issue prices more than three U.S. dollars,have an average IPO underpricing rate of 11.4%. Since then,many scholars have gradually confirmed the existence of a positive IPO underpricing rate. Because the long-term existence of IPO underpricing indicates universal deviation between the secondary market price and the issue price, it is difficult to use traditional financial theories provide a reasonable explanation,which has attracted research interests of many scholars, with the theory formed complicated, more influential such as the Rock model, the signal hypothesis, separating equilibrium model.However, it is not difficult to see that the background of foreign classical theories are mostly mature markets in developed countries. According to Efficient Market Theory, the context of mature markets, due to the secondary market price fully reflect the company's true value, the study of underpricing focused on the formulation of the issue price in the issue market.Similarly, the Chinese A-share market has a long-standing phenomenon of IPO underpricing, and the average rate,whether with the mature or emerging stock markets in comparison, is much higher than the one in markets of this type all over the world.Domestic and foreign scholars has also done a lot of research trying to find the root causes of the long-standing high rate of underpricing.These studies were mostly use efficient markets as the research background, the same as the classical theories of foreign countries.However, as an emerging stock market which began to develop in the 90's, China's A-share market has distinctive characteristics of China, whether the policy-driven nature or investors structure which determines the existence of irrational investors, are making the formation of prices in the secondary market be not able to use efficient markets as the analytical background. Efficient Market Theory does not apply to Chinese A-shares market, which means that prices of new shares listed in the secondary market can be rationally reflect their due intrinsic values. Under such preconditions, trying to find a solution to the problem of China's IPO underpricing only from the issue market may be futile, and it is necessary to re-examine the issue under the market environment in China, which is also the background and significance of this paper.This first chapter describes the background and significance, research ideas and frameworks, research innovations and shortcomings. ChapterⅡis related to underpricing literature review at home and abroad. ChapterⅢdetails the development and evolution of China's securities market in the vetting system and the pricing system, as well as characteristics of the existing market system,with an attempt to affirm the constant improvement in IPO pricing system in the course of China's securities market development,as well as the constant improvement in issuing audit system, trying to reflect the policy-driven nature, as well as the improvement needed. Considering the contention of the possible impact of investor sentiment on stock prices in the behavioral finance, ChapterⅣdetails Derrien's model of investor sentiment, then amends the model according to China's actual situation, with a series of assumptions, so as to affirm the applicability in the Chinese market of the conclusion in Derrien's model, which also becomes the theoretical foundation of empirical analysis for IPO underpricing. In the fifth chapter, multiple regression analysis is done for the IPO underpricing degree of 54 new shares listed in Shanghai and Shenzhen markets in the sample period,using Eviews5.1 and Excel2003 softwares,with issue price, turnover ratio, distribution price-earnings ratio, Shanghai and Shenzhen 300 Index,and the amount of money raised as explanatory variables.Study concluded that, as assumed in this paper, as the alternative variables for investor sentiment,the turnover ratio and Shanghai and Shenzhen 300 Index,not only exist a positive correlation with the underpricing rate,but also has a significant influence on the formation of the underpricing rate. However, focusing on variables that may affect investor sentiment, has led to subjective one-sidedness in the variable selection, which may had a negative impact on the degree of fitting of the model, so that the empirical confirmation may be less than ideal. Thus, this paper holds that the conclusions,drawn from empirical analysis,to some extent,confirms the argument that the investor sentiment does exists impact on the rate of IPO underpricing.For the conclusions derived from the empirical analysis that market volatility has an impact on the investor sentiment,and thus has an impact on the rate of IPO underpricing, this paper has suggested that problems should be treated separately from the issue market and the secondary market, will it be possible to improve substantially the phenomenon of the long-term existance of China's high underpricing rate: 1.The best way is to nurture rational individual investors by systematic theoretical knowledges of securities investment, while the structure of investors in A-share market being gradually improved and institutional Investors being vigorously developed.Only when the market players are mainly rational investors in sufficient quantity,being in full competition and with strong analytical skills, the irrational characteristics of the market volatility would get a good improvement.On the other hand, it is necessary to follow-up reforms of the system,in order to change the status quo of the irrational fluctuations in China's stock market, so as to improve the irrational nature of stock prices in secondary market. Specifically, due to China's A-share market has the policy-driven characteristics, that any change on the administrative regulations is likely to affect the stock market,should the government's role and position be returned. Only in this way can the market mechanism exert its effectiveness.2.It is clear that the solution to the problem of IPO underpricing rate in the secondary market does not improve the long-term high underpricing rate well in the short-term.Therefore, we can consider the second-best solution, that is to integrate the impact of the irrational investor sentiment on the formation of shares prices in secondary market into the IPO pricing process in the primary market, with emotions as a variable into the pricing model, so as to achieve the purpose easing emotional impact on the underpricing, then narrowing the gap between the primary and the secondary markets...