Analysis Of China's IPO Underpricing Of Behavioral Finance

Oversea and domestic research has proved that, no matter in a mature market or an emerging one, the issue price of IPO (Initial public offerings) is normally lower than the real value of its holding company (which has been called IPO underpricing hereafter). From the very beginning, financial studies have paid tremendous attention to this phenomenon. Researchers abroad have raised a variety of theories to disclose the"enigma of IPO underpricing". The relatively novel researches have employed the theories of behavioral finance to analyze the behaviors of investors.Studies have found that irrational behavior widely exists among investors. In the IPO market, owing to the investors'emotional, cognitive and behavioral factors, IPO is labeled higher in the stock market than its issue price. For the undervaluation of the new stock, behavioral finance has offered a solid explanation, which has been proved in the mature market. However, more evidence is still required to tell whether this theory is applicable to emerging markets as well as markets in a system transformation.Taking IPO located in Shanghai and Shenzhen A stock market during 1996 to 2009 as samples, this paper analyzes the causes and implications of IPO underpricing in China. First of all, this thesis studies the root of IPO underpricing in China, to verify if the evaluation of IPO can truly reflect the value of its holding corporation. Here, a regression analysis has been held to investigate the financial status of the corporation, IPO issuance as well as the market situation. Later, by building indicators for representative investors'behavior, and setting up the model of Multiple regression this paper investigates the investors'behavior which influences IPO underpricing. The finding is that the phenomenon of IPO underpricing in China is mainly determined by the investors'behavior in the second-tier market, including noise behavior and emotion behavior.Here, this paper argues that phenomenon of IPO underpricing in China is closely related with the irrational behavior of the investors, and the major contributors to this are immaturity of the investors, government's over-involvement in the market, and the absence of a robust information disclosure system. In the final part of the thesis, the author has proposed several solutions and suggestions for IPO underpricing.