Study Of IPO Initial Return And Long-Term Performance Based On Underpricing And Overpricing

Two types of"anomalies"are prevalently existed in IPO area, that is, high initial return caused by obvious underestimate of issue price and subsequent long-term underperformance. These "anomalies" are called by both theoretical circles and practical circles as"the puzzle of IPO". Although lots of scholars in and out of our country have made many researches about them, they just have found Chinese initial return of IPO creating a world record for several years but the long-term performance is also a debate. The study object of this paper is the change process of IPO price from the offering to first-day and post-listing that covers a long period of time(three years), which aiming at answering following key questions:During numbers of transformation of issue system in primary market is IPO underpriced? And is it the main cause of IPO high initial return?How do factors such as investor sentiment lead to the high rise of first-day price in secondary market, which means IPO high initial return.Whether IPO long-term underperformance exists? Whether it is the opposite movement of high initial return, and how to explain it?Firstly, by literature reviews, this paper introduces the course of IPO practice in many countries as well as the study production of IPO first-day and long-term price. Research direction and content of text are also confirmed in this part. The core of the paper is analyzing Initial Return in China from two aspects: underpricing in the primary market and overpricing in the secondary market. On this basis, expounds systematically that IPO high initial return is a combination of underpricing and overpricing. Then, paper examines the existing of overpricing by IPO long-term underperformance caused by drop of initial return.Secondly, this paper discusses the problem of IPO underpricing in the primary market from the view of development of system. At the beginning, it summarizes the influence to underpricing of development of issue, examination and approval, as well as pricing systems. Then, it selects 1098 IPO samples from 1996 to 2006 listed in A-Share market and tests their underpricing rate by dividing samples into groups and selecting return measurement methods. We find, if limit of issue P/E Ratio existed in issue process, prices are often lowered, and high underprcing rate will arise. But the degree of underpricing decreases obviously with the improvement of primary market. After that, adding factors: issue regulations and equity separation, which are both unique characteristics of China in univariate analysis and multiple regression analysis, we find that government regulations and equity separation lead to mispricing of IPO in primary market.In the third part of this paper, we analyze the problem of IPO overpricing in secondary market from the view of Behavioral Finance. Considering the existing of strict short sales constraints in A-Share secondary market, the form mechanism of overpricing is deducted by mathematical models. In Empirical test, a complete indicator system including indicator such as investor sentiment, closed-end funds discount and market book ratio is constructed using factor analysis method. Creatively, an overpricing model is constructed by using first-day residual turnover to measure heterogeneous beliefs. The finding is, market sentiment and heterogeneous belief are the major factors of IPO overpricing in secondary market,and they also have great effect on the whole IPO initial return and IPO initial abnormal return. But heterogeneous belief has no effect on underpricing in primary market. In a word, both mathematical deduction and empirical test confirm strict short sales constraints as well as noise traders are the main factor of high overpricing in secondary market.Finally this paper investigates the long-term share price performance of 985 A-share IPOs in Chinese A-Share market. And significant long-term underperformance is found for CAR, BHAR, CAPM three methods. Introducing heterogeneous beliefs into long-term performance research, and interpreting early-market return volatility as a proxy for heterogeneous beliefs about a stock, we find that it is related to subsequent IPO long-term abnormal returns.The main contribution of this paper is to investigate the problems of IPO underpricing, overpricing and long-term underperformance systematically, with the consideration of development of issue system, short sales constraints, investor sentiment and heterogeneous belief, etc. We find, the main reason of high initial return in Chinese A-Share market is overpricing in secondary market, rather than underpricing in primary market, which is obviously different from mature capital market.