Investor Sentiment And IPO Underpricing

Since 1960,Financial scholars began to study IPO underprice.There are two views to explain the IPO underprice.First,the price of primary market is too low.Second,the price of security secondary market is too high. This leads to different points:the Winner’Curse, Proce Support Hypothesis,the Lawsuit Avoidance Hypothesis, Informational Cascade. These traditional theories can explain IPO underprice in the early period.As the global IPO issuance system, pricing system changed, traditional theories faced challenge. At this time, behavioral finance was popular. Behavioral finance explain IPOs from investor sentiments.Secondly, we talk about the process of investors congnitive. Cognitive psychology introduces the process of making decision.The process is included of getting information,dealling with information, output information and information feedback.In these processes,there are usually many cognitive biases. In this chapter, we also introduced the pricing model based on investor behaviour-DHS model and DSSW model. The two model can explain IPO underprice:the behavior of crazy optimistic investors and positive feedback traders cause the price of stock deviating its true value.With China’s growth enterprise market opened, high underprice rate of IPO come into scholars. Now,scholars are inclined to use investor sentiment theory to explain high rate. However, there are not uniform standard to measure investor sentiment. For example,many scholars choose closed fund discount rate, lot winning rate, turnover rateas investor sentiment index.But these indicators only reflect a certain aspect of investor’s emotion.Many scholars tend to build a composite index to reflect investor sentiment.We select the enclosed fund discount rate,volume of IPO,number of IPO,investors consumer confidence index, using the principal component analysis method to construct a compound investor sentiment index-CICSI index. Next, based on the data from our growth enterprise market 2009.12-2010.12,we do the stepwise regression.IPO underprice is research object,and financial indicators,investors sentiments indicators are independent variable.The empirical research shows that,investors sentiments significantly influences the IPO underprice.