Investor Sentiment And China GEM IPO Initial Returns Study

The High Initial Returns of Initial Public Offerings(IPOs), which is also calledIPO Underpricing, is that the stock’s closed price in the first day after enteringtrading market is much higher than its offer price, which results in the big differencebetween the offering market and the trading market, leading to a high excess returnyield of Initial Public Offerings. IPO Underpricing is an abnormal phenomenonwhich widely exists in the global financial market. There is also an obvious IPOUnderpricing phenomenon in China Growth Enterprise Market(GEM). As of Sep30th,2012, disregard of the impact of6delisting stocks,300stocks were foundunderpriced among the355stocks which were listed in the GEM of Shenzhen StockExchange. All28stocks in the first batch of list were underpriced, and the meanvalue of IPO underpricing rate was up to106.18%;272of321were underpriced inthe follow-up and retaining stocks, and the mean value of IPO underpricing rate was41.58%. According to IPO Underpricing phenomenon, many kinds of hypotheseswere proposed in previous studies to analyze the issue. But from either domesticstudy or aboard, the classic financial theory does not effectively explain the IPOunderpricing.This paper bases on reviewing the previous studies and summarizing theexisting literature, takes investor sentiment that comes from behavioral financetheory into account, tries to analysis the IPO Underpricing phenomenon in ChinaGEM, and use all the stocks listed in Shenzhen Stock Exchange GEM from Oct30th,2009, to Sep30th,2012, as the empirical analysis samples, and finally reach thefollowing conclusions: Firstly, the Investor Sentiment in China GEM primarymarket is so enthusiastic that it may be the reason of the high initial returns of IPOsin some degree; Secondly, there is also a kind of enthusiastic Investor Sentiment inChina GEM secondary market, and Herding Behavior may cause the high initialreturns of IPOs; Finally, from the output of the empirical analysis, we can draw aconclusion that compared to the GEM primary market, the factors that lead to IPO underpricing in China GEM is more likely from the investors’ irrational emotions inthe secondary market.