The Empirical Analysis Of The Effect Of Investor Sentiment On IPO Underpricing

IPO underpricing, one of the mysteries of modern finance has become the focus of the academic research field gradually in recent decades. The explanation for it can be divided into two aspects:the first one focus on whether the offer price is set too low due to ex-ante uncertainty about the true market value of the IPOs while the second is argue that the offer price might be set at a "fair value ",but the demand for new issues is overwhelmingly high and therefore generating the observed high initial returns on the secondary market. Domestic research focus more on the special institutional arrangements of China’s capital market and pay less attention to the sentiment of the investors. In fact, the system for issuing new shares of our country is in the process of reform and it has took a big step on the road towards marketization. The defects of the issuing system is no longer the main reason for the IPO underpricing. With the deepening of the psychology and economics and behavioral finance theory have been developed dramatically. More and more experts and scholars believe that the first-day abnormal returns of IPO are mainly affected by investor sentiment in the market.This research is based on the behavioral finance theory. According to the analysis of the characteristics of the investor sentiment in domestic capital market and the causes of formation of these characteristics, this article finds that investor sentiment is widespread in China’s capital market. Derrien Model is introduced in this article to model behaviors of the institutional investors and the noise traders in the GEM market of China.This paper argues that when the IPOs go to public for the first time on the GEM market, the huge demand of noise traders push the trading prices of the the shares in the secondary much higher than the IPO price. And then, as time goes by, the noise trader’s understanding for new shares become more and more rational, then the trading price falls to the normal level.After referring many literatures concerning the the representative index of sentiment both home and abroad, this article choose several representative sentiment index which can make the investor sentiment index system more perfect. Noise trader sentiment indicators includes turnover, lot, mrt60and preipo. The Control variable indicators includes lnsize, age and bbw. Through regression analysis and correlation analysis, this research finds that the first-day abnormal returns of IPO on the Gem market grows as investors manic degree increases. Further analysis shows that the first-day supernormal profits of IPO are mainly caused by the investor sentiment rather than setting the offer price at a too low level deliberately.This research finds that the first day abnormal returns of IPO in the GEM is mainly caused by the sentiment factors including which are widespread through the market. We should concentrate on investor sentiment in the IPO market, and provide guide for the investors to make rational decisions. Only in this way, the IPO underpricing phenomenon can be solved and the GEM can develop healthily.