An Empirical Research On China’s GEM IPO Long-term Performance

China GEM, plays an important role in the implementation of economic transformation strategy, founded on October30th2009, is a second-board stock market which is inferior to the main board. In many aspects, GEM is quite different from the main board. Its main purpose is to support the development of SMEs and provide financing platform for the implementation of the china’s innovation strategy.NASDAQ, the world’s most successful GEM, having cultivated a large number of U.S. high-tech giants such as Microsoft, Intel, Apple, Cisco, etc., and provided great support for the U.S. high-tech industry development and sustained economic growth in recent years. As of the end of2013, there have been more than40countries or regions establishing more than70GEMs, but not all of them as successful as NASDAQ, nearly half of them were forced to close.Learning from history, how to develop China GEM will become a key topic. China GEM, still in its infancy, still in the exploratory stage in many aspects, has met troubles that other countries have met while developing their own GEMs. Beginning GEM research from all aspects and finding solutions to the problems faced by the GEM timely is very necessary for the healthy development of the GEM.On GEM market studies, researchers mostly focused on the problems faced during the short period(before and after listing) represented by "three high" problems. Long-run underperformance of stock price after the initial public offering (IPO) is a significant anomaly, but few scholars concerned. Therefore, whether the Long-run underperformance of GEM exists; what is the relationship between this IPO phenomenon and the other anomalies; if it really exists, and what play a crucial role? This paper is trying to resolve these problems.This paper consists of five parts. The first part is an introduction to the research background and research significance. The second part is the literature review. Firstly, the domestic and international empirical researches on the long-run underperformance were reviewed and evaluated. Secondly, the researches on the china GEM were reviewed and evaluated, and then found the current research trends. The third part is a long-term performance test of the GEM. This part firstly introduced the sample interval and data sources of the paper, then introduced the long-term performance measures, and finally gave test results and conclusions. The fourth part is the empirical analysis of the long-term performance factors. The fifth part gives the main conclusions of this paper.This article comes to four main conclusions. First, by comparing the correlation of the GEM index with the SSE SME Composite, the Shanghai Composite Index and Shenzhen Component Index, found the GEM index has the strongest correlation with the SSE SME Composite. Second, China’s GEM IPO market exists serious long-run underperformance. BHAR method and CAPM approach show that long-run underperformance really exists in the GEM IPO market. BHAR results based on the Shanghai Composite Index and the CAPM calculation results are very close, and less than the BHAR results based on SSE SME Composite. Third, there has a certain relationship between "Three High" problems and long-run performance. The higher the initial return rate, the lower the long-term excess returns; the higher the price-earnings ratio, the higher the long-term excess returns; the higher the superb raised funds rate, the higher the long-term excess returns. Long-term under-performance is a balance of high initial returns, that is, at the beginning of IPO, investors are over-optimistic, as time goes by, more and more information goes to the public, and reflected in the share price, the share price gradually corrected. Fourth, the companies with higher BM ratio, shorter issuing-listing interval and lower secondary market sentiment have better long-term performance. Multiple regression analysis results showed that some factors on behalf of firm features, issuance characteristics and secondary market sentiment have significant impact on the long-term excess returns. Among them, the most significant factors are the BM ratio, issuing-listing intervals and the secondary market sentiment indicators. The BM ratio has a positive effect on long-term performance, while issuing-listing interval and secondary market sentiment indicators have a negative effect on the long-term performance.