Research Of IPO Undcrpricing Based On Investor Sentiment

The IPO underpricing is existing in every stock market, the experts have made a lotof research on this phenomenon. Early research mostly concentrate on lower issues price,and argue that underpricing are taken by the issuers and underwriters in purpose to makesure public successfully. Since1980s, with the developing of behavioral finance,researchers start to find the explanation from trade market, they consider that theovervalued stock price is the reason of abnormal returns of IPOs.China’s stock market has the character of short history and small size, the individualinvestors are lack in financial knowledge and related experience, so their sentiment willaffect their decision, then the behavior of transaction, further the stock price. Meanwhilethe issuers and underwriters are sophisticated to take advantage of this optimisticsentiment for higher abnormal return of the first trading day.The paper analysis how investor sentiment affect the IPO price combine with thecharacters of China’s stock market, and analysis the affection on IPO underpricing ofsentiment. We use the lottery rate, the average return of5former IPO, the turnover rate torepresent the investor sentiment. The IPO data are from2005to2011of Shanghai MainBoard and SME Board, and we analysis Main Board, SME Board, Break stocksseparately. In the part of empirical analysis, we created a new variable “AbnormalReturns of Open” that had no relation with sentiment to study the underpricing.The paper proceeds as follows. We describes the investor sentiment in SectionⅠandanalyses the affection of investor sentiment on IPO underpricing in SectionⅡ.Section Ⅲintroduces the character of China’s IPO market. Section Ⅳ empirical analysis. Section Ⅴthe advice on how to reduce the IPO underpricing.