Investor Sentiment On The Impact Of IPO Underpricing

Beginning of this article leads to the Western academic "IPO underpricing mystery"- the phenomenon of IPO underpricing. This phenomenon generally exists in the world, while Chinese stock market has its own characteristics. Different from Western markets, we propose three special features of Chinese stock market and focus on the range around the topics of IPO underpricing. Since the eighties of last century, more and more persons concerned about Behavioral Finance. It is often used to analyze the investors' decision-making errors and biases because of the psychological factor and some kind of market anomalies in the capital market. We lead to "investor sentiment", which is commonly used in behavioral finance. Here is the question:does investor sentiment have any impact to IPO underpricing? Then proposing:Does Investor sentiment have effect on IPO underpricing? The effect on IPO underpricing is positive or reverse? To how much degree does the investor sentiment influence IPO underpricing?We have made preparations for the following three aspects before analyzing the problem:First, review of relevant literature. Overview the foreign IPO underpricing theories and Chinese A share's IPO underpricing. We focus on the theories about IPO underpricing of investor sentiment research from the aspect of behavioral finance.Second, describe the main research method in this paper - principal components analysis (PCA). We introduced the basic idea of principal components analysis, summarized the mathematical ideas of principal components analysis and the extraction of principal components.Third, start the selection of the data. From the changes of Chinese A Share Issuance System, we chose the Main Board IPO Data in the Shanghai and Shenzhen A shares from January 1997 to December 2009, excluding those whose issue price less than 2 dollars. The total sample number is 2106 including 1187 from Shanghai Stock Market and 919 from Shenzhen Stock Market. We selected the first day of IPO's closing price, the turnover listed on the first day, the total number of shares and the flow number of IPO Shares. In order to gain more influencing factors as many as possible, we also selected the data about the time of IPO, etc.All the stock transaction data come from the GTA (CSMAR) database. The missing part of GTA database is searched from the Company Prospectuses of Shanghai Stock Exchange and Shenzhen Stock Exchange Web site. We selected closed-end fund discount, the first day of turnover, liquidity and month's market rate of return as explanatory variables as a measure of investor sentiment. We selected IPO underpricing rate as explained variable as a measure of IPO underpricing level. After selected data, we made descriptive statistical analysis toward the sample.Next, we started to analyze the problem. We believe that the higher the market sentiment indicates the greater the demand for stocks. In the supply of certain conditions, according to the basic principles of economics, new shares issued on the first day's closing price should be higher, so IPO underpricing should be greater. Therefore, we expect that investor sentiment on IPO underpricing is a positive effect. Then we carried out the empirical analysis, started principal component analysis for the four original indicators of investor sentiment and built sentiment index. We built econometric model to analyze investor sentiment index on the impact of IPO underpricing, returned to get the results and confirmed our previous hypothesis preliminarily.However, we take into account the investor sentiment including the impact of two sides:first, changes in macroeconomic factors, and second, changes in emotional state of investors. Therefore, we consider the selected factors in investor sentiment separated from the macroeconomic impact, and ultimately to retain their own emotional factors reflect changes in investors. We got investor sentiment indicators removed of macroeconomic factors, used it to start principal component analysis again and came to sentiment index. We built econometric models to analyze investor sentiment removed of macroeconomic factors on the impact of IPO underpricing once more. We return to the final results that are consistent with our initial expectations. Finally, we made conclusions based on the empirical analysis to solve the problem. Investor sentiment index removed of macroeconomic factors on the impact of IPO underpricing has a significant effect at the 10% level, the direction is positive. The significant positive impact of Investor sentiment on IPO underpricing has a practical significance for Chinese economic construction. We proposed counter measures from both investors and policy framework.