The Study On IPO Initial Return In China’s Growth Enterprise Board Market

China’s Growth Enterprise Board Market began in Shenzhen Stock Exchange in October2009. GEM has been the focus of the shareholders in less than four years. Mainboard market anomalies in the growth enterprise market highlights, superb offering, high P/E ratio and high intensified closing, at the same time, the Chinese stock market has been exist in higher IPO initial returns, especially the growth enterprise market is more serious, far more than the world average level at present. Most scholars’research focus on the main board market, the study of the growth enterprise market is relatively less. This paper is focused on GEM IPO (new shares issued initial public offering) the problems of high initial return.The IPO initial return is one of hottest issue in the stock market. There is always a high IPO initial return in our country, especially in the growth enterprise market which was started in October2009, which was far more than the world average level. This had attracted great attention in academic circles and became one of the problems we needed to solve. Reason for the IPO initial earnings is nothing but two:one is the issue price of stock is too low, namely from the perspective of rational explanation for the underpricing; the other is an overreaction of new shares listed on the first day, which is called overpricing from the perspective of the irrational explanation. Both will affect the IPO initial returns.The primary market and secondary market in China both has its special place: the primary market is the regulatory power dominant market. Whether the issue price fully reflects the intrinsic value of the shares? Whether the issue price of IPO pricing is too low? Whether it is the main factor that leads to high IPO initial returns? There are strict short sales constraints in the secondary market and retail investors as the main market investors. How the behaviors of investors push on and make the stock market price deviation from its intrinsic value? Whether the irrational behaviors of investors in the secondary market lead to the price invalid? Is it the root cause of the IPO initial returns? This paper analyzes the IPO initial returns in GEM from two aspects: underpricing in the primary market and overvaluation in the secondary market. This paper takes355listed companies in the GEM as samples, we calculate stock’s intrinsic value through the Residual Income Valuation Model and comparing it with the IPO issue price to check whether IPO underpricing in the primary market. Next we analyze the formation mechanism of IPO overvaluation in the secondary market, finally the empirical analysis of IPO premium in the secondary market. The conclusion is that the cause of China’s stock market IPO initial returns is not from the primary market, that is, there are no issuers and underwriters intentionally to depress the price of new shares. We can believe that the cause of the high IPO initial returns in China is mainly caused by the reason of overvaluation in the secondary market. And we think the causes of new IPO initial returns are caused by irrational behavior and mood of investors themselves, and then we verify the validity of the hypothesis through the empirical analysis. Both positive feedback traders and enthusiastic investors, or different opinions on stock prices have significant effect on the IPO premium. PE ratio and age of firms are positively related to the IPO premium, but the company growth, lottery winning rate, company size, Industry category is not related to the degree of IPO premium.In this paper, the research results show that the new shares of IPO pricing mechanism in China has made substantial progress through several reforms. Basically realize the marketization of the irrational behavior of investors the significant influence to the IPO premium. This paper puts forward the following suggestions. First, cancel the short-selling restrictions of the stock market in our country as soon as possible. Second, carry out a more strict information disclosure system. Third, establish strict delisting mechanism. Fourth, strength the education of investors, encourage the development of institutional investors.The research results show that the IPO pricing mechanism in China has made substantial progress through several reforms. Based on the significant influence of investors irrational behavior to the IPO premium, we should continue to adhere to market-oriented policy and achieve the smooth development of the stock market by strengthening the education of investors, encouraging the development of institutional investors, prompting investors to develop in the direction of rationalization. In the current under the background of the growth enterprise market is imperfect. We research the GEM IPO initial returns and provide a new viewpoint to fully explain the IPO initial returns, help to enrich related research in the field of IPO in our country, for further consummates our country stock market, to make more rational investment policy, maintaining the stability of China’s securities market and the society has the extremely vital significance.