Impact On Three Kinds Of Transaction Risks Of The Temporary Suspension Of New Shares Listed On The First Day

Participating an initial public offering (IPO) has been hype among A shares market investors for quite a long time. Investors usually can make significant income in the short-term thanks to the high rising rate and high exchange rate that come along with IPO. Unfortunate, those investors who buy the shares on the first day of IPO are more likely to become the victim of being hold up in the market when it comes to the long-term outcome. In order to protect the investors of mid-to-small size and to cool down the IPO heat, Shenzhen Stock Exchange launched the policy of Temporary Suspension of New Shares Listed on the First Day. Under this policy, temporary suspension would be applied when certain trading indexes was "touched", such as the share price rising rate and exchange rate.In March,2012, Shenzhen and Shanghai Stock Exchange both released updated versions of the policy regarding the temporary suspension. This releasing drew an incredible amount of attention that had never happened since the birth of the policy. The new versions set more strict standards onto the relevant transaction indexes and the time span of the temporary suspension. According to the policy document, this revision of the policy was aimed to control the risks of first-day-transaction.Under the context described above, the paper would like to go deep into the concept of first-day-transaction risks and discuss what kinds of risks the investors have to bear. The policy regarding the temporary suspension released in March,2012 was studied and analyzed in detail with the focus on 1)whether the first-day-transaction risks exist 2)what impact the policy had on the first-day-transaction risks and.Three categories of the first-day-transaction risks were summarized in the paper, which are risk of high volume, risk of high price and risk of chain effect. Risk of high volume means the risk coming along with high exchange rate. Risk of high price means the risk caused by high rising rate of the share price. Risk of chain effect means the impacts that the price rising on the first day would have on the following days.786 IPO shares issued between the early 2010 to November,2012 in the stock market for A shares were selected as sample for assessing and comparing the three identified risk types. The method of event study was followed and all samples were grouped into three sets based on the applying times of temporary suspension in order to analyze the impacts that the policy had on the risk of high volume and risk of high price. In addition, the autoregressive model revised with GARCH model was used to illustrate the chain effect. Dummy variable was utilized to dig further into how the policy affected the risk of chain effect.In conclusion, the existence of all three risk types was proved but the policy did not work for controlling any of them as planned and expected. What is worse, the impacts of all three risks turned out to be even more severe under certain circumstances. The paper proposed the reasons why the policy failed and generated recommendations in policy revision of the future.