Impact Study. Investor Sentiment On The First Day Of Ipo Excess Returns

IPO's abnormal initial return has puzzled scholars for many years. Up to now Researchers have provided two explanations: underpricing in the primary market and overvaluation in the second market. This phenomenon is also existed in China. Based on Chinese previous strict financial regulation, researchers normally think financial regulation makes IPO underpricing in the primary market. However, after bookbuilding mechanism being introduced in Chinese IPO markets since 2005 and the government reforming the segmentation of equity, Chinese IPO's abnormal initial return is still very high. With a sample of 203 A-share IPOs during 2006-2008, we test the efficiency of IPO pricing by using stochastic frontier approach. The results indicate that IPOs did not deliberate underpricing in the primary market. So according to the serious gambling sentiment in Chinese stock market, we study Chinese IPO's abnormal initial return by researching the investors sentiment's influence on the first day's closing price in the second market.This paper analyzes the characteristics of normal investors' sentiment and points out that Chinese investors are extremely optimistic and over confident of IPO shares. Accordingly, we sort the noise traders into optimistic investors and positive feedback traders, and introduce two models (DHS& DSSW) to understand the noise traders' influential mechanism. Stimulated by optimistic expectations about the IPO firms, the optimistic investors pay a high premium for IPO firms. The demand from positive feedback traders also contributes to the high premium on the first trading day. When the market receives more and more public signals, the prices will return to the true value over the long run.Using the same sample, this paper selects sentiment indexes to delegate optimistic investors and positive feedback traders, and makes correlation and multiple regression analysis, which further proves that investors' sentiment is the key factor to Chinese IPO's abnormal initial return. In the end, we advise that the government should make the investors more rational to improve the efficiency of capital collocating in IPO's market.