The First Day Of The Chinese Ipo Excess Returns Theory And Empirical Analysis

The IPO pricing involves activities of government, intermediaries, investors and public enterprises. It is the result of multiple gaming. As an abnormal phenomenon, however, the abnormal initial return (AIR) has never been eliminated. Scholars all over the world made a lot of studies during passed several decades. Before the 1990's, the main point of view on the cause of AIR is the underpricing of primary market, which is to compensate the risk encountered by investors. Later on, more scholars noticed that not only underpricing but also overevaluation contributed to AIR. The overevaluation is produced by the inefficient secondary market, which induced a lot of arguments between traditional EMH and behavior finance theory.This paper systemically examines the AIR phenomenon at both sides: the pricing on the primary market and the evaluating on the secondary market.On theory aspect, behavior finance theory is adopted to prove the secondary market is not as so efficient as claim of traditional finance theory. It is the base of decomposing the AIR into the underpricing and the overevaluation. On the underpricing, it is divided into three parts: risky underpricing, controlled underpricing and perspective underpricing, which covered the international main point of view and considered the special character of China stock market. The analysis tool is basic supply-demand principle in economics. Regarding to overevaluation, one mathematic model is introduced to illustrate the exchange behavior of rational investors and irrational investors (including passive investors and positive feedback investors). The model successfully explains the overevaluation by describing investor's behavior and the interaction among them. In additional, the model can also present the long run performance of IPO well.On demonstration aspect, the paper examines the almost ten-year (1998-2007) status of China IPO market. The benchmark approach is adopted to separate the underpricing and overevaluation. And then, their characters are analyzed by descriptive statistic, sensitive analysis for single factor (basing on Hypnosis test) and multiple factor regression. It is concluded that the underpricing decreased with the improvement of regulation in primary market, while overevaluation exhibits more uncertainty. Furthermore, it also explained one China stock market puzzle: the phenomenon of price-earnings ratio exhibiting same trend with AIR. Finally, the examination on IPO long run performance double confirmed the AIR decomposition is reasonable.At the end of the paper, some advices on further reducing AIR are given. Meanwhile, the author suggests the possible improvement for coming analyzers.