The Behavior Of Financial Vision Of The Initial Return Of Ipo Research

One of the persistent features of the IPOs ( initial public offerings) market is that it is always with positive first day return which is usually called IPO underpricing for a newly issued share. Compared with stock market of developed country, the degree of IPO underpricing in our stock market is all quite serious. It has interfered the healthy growing up of the Chinese stock market, even endangered the development of national economy. The meaning of this article lies in: By analyzing the IPO underpricing phenomenon in Chinese stock market, to find the main factors influencing the IPO underpricing and the main reason which causes IPO to be underpriced, then to put forward the corresponding suggestions to reduce the degree of IPO underpricing.In this article, I review the theory and evidence on IPO underpricing. Then Using data on 552 new issues from 1 January 1996 to 31 April 2005 in China, I employed cross-sectional analysis on it,and then I applied behavioral finance theory to give a analysis for it.I conclude that high level of initial returns of IPOs in China is primarily explained by the behavioral biases of both issuers and optimistic investors. The optimistic investors denote incorrect beliefs about the long-term expected value of an IPO share and pay for it much higher than its fundamental value. Issuers fail to capture all the excess valuation over the fundamental value because they tend to feel complacently about the gain they get in the process of IPOs as their shares are seriously overvalued and are easy pushovers in bargaining over the offer price. Investment bank can benefit from the issuer's behavioral biases and they can low the risks ofmarketing the IPO shares and being sued for dishonestly disclosure of information by lowing the offer price. All these interact with each other and result in high level of returns of Chinese.