Study On IPO Underpricing In China’s GEM

At the end of October2009GEM was launched successfully as fresh blood that injected into China’s securities market, which will also play a pivotal role to promote the continuous development and improvement of China’s capital market. However, the fledgling GEM is also facing various problems. For example, the phenomenon of super-raised funds listed companies, executives leaving and cashing out their shares, retail investors are not stuck due to the phenomenon of rational investment, etc. These phenomena will undoubtedly affect the healthy development of the GEM. So what is the real causes of these problems--IPO underpricing.The amplitude of IPO underpricing on GEM market is large and high for long time. The issue price and the trading price have a serious deviation from the intrinsic value of the stock, which will be adversely affect to the healthy development of high-tech enterprises as well as the capital market. First, one can not lose on the primary market, which greatly improves the risk-free purchase of new shares, resulting in a large number of money could have been used in the field of production and circulation into the primary market, which not only fueling speculative bubbles stock market but also leading to a misallocation of funds, so the role of resource allocation of the GEM has been greatly weakened. Second, investors buy shares on the primary market and sell on the secondary market. This short-term arbitrage attracted huge amounts of money in a very short period of time to enter into the GEM, which inevitably result in abnormal fluctuations in the stock market. Originally GEM market investment risk is greater than the motherboard market, which will further increase the investment risk of GEM is detrimental to investors,is not conducive to long-term development of enterprises.Third, the high yield issuance resulted in a high IPO underpricing。Over time, the stock price will eventually return to their intrinsic value. But when the bubble burst, the GEM will be affected, and be likely to spread to the motherboard market, the development of China’s capital market suffered a fatal blow.The phenomenon of IPO underpricing is very complex. These traditional economic theory for example efficient market hypothesis and the arbitrage pricing theory, etc, which has been insufficient to explain this complex phenomenon. Although the theory of asymmetric information model has been popular in academia, but all the theories about the IPO underpricing overemphasize his theory while ignoring other theories. Meanwhile, since the late development of the securities market, the majority of individual investors’ investment behavior is very rational, resulting in secondary market is not fully effective, which also greatly weakened asymmetric explanatory power of the theory of the PO. Behavioral economics assume that the market is not completely effective, and explain IPO underpricing.Therefore, the theory will in future continue to be applied research and developmentSeen from the existing empirical point of view, the main use of OLS and PCA test a market underpricing. Explanatory variables used in these regressions are the actual issue price, and therefore, when artificially issued at a discount on the primary market, these regression equations had underestimated the true value of the IPO. Of course, the regression results will lack credibility. However, the stochastic frontier model has overcome these deficiencies, and opened a new door for studying the GEM IPO underpricing.On the basis of research from home and abroad, we study the GEM IPO underpricing in the primary market and secondary market separately. This article will use the stochastic frontier approach to research the pricing of new shares, this method was originally used to test the efficiency of the production process technology. This article used Analysis Software Front4.1for an empirical study about IPO pricing efficiency to verify the existence of a market in human behavior issue new lower prices. So we will target to the secondary market about main reason of IPO underpricing.Meanwhile, on the interpretation of IPO underpricing, conventional economics has become increasingly weak, and behavioral finance theory is increasingly being accepted. Irrational investor sentiment may be important reasons for forming GEM IPO "three high" phenomenon and IPO underpricing high coexistence. On the one hand, China’s newly issued shares on GEM have shown a "scarcity". It is difficult for investors to purchase shares in the primary market success, which brought the blind enthusiasm into the second market, and lead to excessive speculation, pushed the starting price of the stock. On the other hand, China’s securities market started late, the low quality of domestic investors, the lack of investment theory. This leads to market information feedback is not rational, herding obvious. Therefore, this paper first looks measure equity market sentiment indicators and indicators of sentiment on behalf of individual stocks, and then use principal component analysis to construct composite indicator of investor sentiment, and then add some control variables in the case on the GEM IPO underpricing multivariate regression, and thus to determine whether investor sentiment GEM IPO underpricing is the real source.The main conclusions are as follows:1. Our GEM IPO underpricing is more likely due to the GEM secondary market but not derived from the primary market.2. Investor sentiment is the most important factors affecting the rate of IPO underpricing. The real reason of China’s GEM IPO underpricing comes from the secondary market.3.In China the number and scale of companies listed on GEM is small, so the supply of shares is inadequate, which likely to cause investors through the secondary market speculation to increase stock prices, resulting in a high IPO underpricing.4. As time goes on, IPO underpricing got lower and lower.