The Research Of IPO Short-run Excess Return And Long-run Performance Based On Investment Sentiment

Initial public offering (IPO) in securities market has become a hot research area for researchers. Most of them focus on the short-run excess return and long-tern performance. IPO first-day excess return means the closing price of first day is higher than issue price. Compared with mature market, this phenomenal is prominent in Chinese market. Scholars have researched this based on asymmetric information in the first market. But this first market theory is based on the efficiency of second market. Is the second market really effective? With the development of behavioral finance, more attention has been put on the second market.This paper divided first-day return into two parts:first market underpricing and secondary market overvaluation and tried to analysis the reason of this phenomenon from perspective of investment sentiment.This paper first made research on the underpricing in the first market. Using stochastic frontier approach, we tested the data between 2006 and 2010,507 samples, trying to find whether there was an intentional underpricing. Results showed that there was no deliberate underpricing and the price efficiency can be 99.9%. We can conclude that initial excess return can largely be the result of overvaluation in the second market.Then we set up multivariable regression model trying to find the relationship between variables and overvaluation. Results showed that investment sentiment variables (lottery rate, turnover rate and first day PE) are significant related with overvaluation. On the contrary, variables about the value of a company (earnings per share, ROE and asset-debt ratio) were only slightly related. We can conclude that investors are over-optimistic about new share and neglect true value of a corporate. Besides, this paper researched the effect of outside market. Outcome showed that hot market can raise investment sentiment and so the same with first day return.Finally this paper measured long-term performance to re-examine first day excess return. We found higher investment sentiment leads to higher first day return and one-year’ holding excess return is negative. When investment sentiment is lower, performance can keep positive return. This proved investment sentiment create certain amount of price bubble. As investors became more rational about the value of a share with more information, the price could return to its intrinsic price and so the same with the long-run performance. We did regression between 3 years’ performance and investment sentiment variables and financial growth variables. Results showed that investors pay more attention to a company’s potential. And long-term performance was positive rather than negative.Through above studies, we can conclude most of first day excess return can be attributed to secondary market and secondary market has significant influence on the return. All these will lead to price adjustment in about 10 months. And long-term performance depends on a company’s growth potential. At last this paper put forward several suggestions, such as enhancing investors’ education.