Investor Sentiment And The Gem Ipo First-day Gains Research In China

IPO abnormal initial return is one of the top ten mysteries of the study of modern finance, which has been well attracting academia and industry attention. China’s Growth Enterprise Market was officially established on October30,2009.The first listing of the28shares were on average or up to106%on the first day. There is a positive meaning to study the first day performance of the shares of China’s Growth Enterprise Market, which can help to figure out the efficiency of the GEM, pricing factors, the future stock price movements and the effectiveness of the distribution system after the reform.IPO initial return is the price difference between the primary market and the secondary market.Both the lower offering price and higher initial trading price are positively correlated with IPO initial return. This paper study IPO issue price and trading prices with the perspective of investor sentiment, and comprehensively figure out the formation mechanism of IPO initial return of the GEM.The paper chooses195IPO companies which issued shares in the GME in the period of October2009and April2011for the sample. Using the method of Stochastic Frontier Model examines the issue prices and the results show that IPO issue prices are most higher than accounting values of companies.Then the paper proves the existence of investor sentiment in the primary market of GEM by the empirical results that the demands of new shares subscription are positive correlation with IPO initial returns of last month. Further study shows that investor sentiment is positive correlation with the new issue prices of new shares, that is, optimistic market sentiment will improve the IPO issue price, pessimistic market sentiment will reduce the IPO issue price. Summing up all the studies of this section to draw the final and most important conclusion:the optimistic investor sentiment in primary market of China’s GEM can reduce the IPO initial returns by the way of improving the issue prices.Because of the strictly short selling restriction and the short history of China’s GEM, the seller power is less than the buyer power. More investors purchase less new shares so that the trading prices are pushed high which cause a positive IPO initial returns. Empirical study the sample of195IPO companies with the value variables of company and the variables of macro-environmental impact as controlled variables and results show:investor sentiment are significantly positive effect the IPO initial returns and the variable value of the company has poor explanatory power on IPO initial returns, which indicate the purchase behavior of investor sentiment in secondary market is the main reason of IPO initial returns of China’s GEM.The study shows that investor sentiment is widespread in the primary and secondary market of GME, IPO initial returns depend on the combined effect of investor sentiment in two markets. Investor sentiment in the primary market has a negative power on initial returns while the secondary market positive. Therefore, the reduction of IPO initial return is not a good measurement of the performance of the reform of IPO system. It is necessary to establish a mechanism to ease investor sentiment to improve market efficiency.