The Explanation Of Behavioral Finance For IPO's Abnormal Initianl Return In China Under Inquiry Mechanism

IPOs initial return has been an abnormal phenomenon existing in almost all stock market.Researchers have provided two explanations for this new issues puzzle. The one is underpricing and the other is overvaluation. Compared with foreign mature capital market, IPOs initial return in our stock is so serious . National researchers have been exploring the reason how the high initial return has formed, combined with characteristic market condition and mechanism background in China in the frame of classic finance theory. New issue has adopted Bookbuilding Mechanism since 2005,but market reform of issuing price has not eliminated high intial return radically. The intial return has rised,but not droped. Why setting price by market cannot decrease intial return effectively?What factors has resulted in initial return?Based issue above, this paper tries to explain IPO's initial return in bookbuilding mechanism in China from underpricing and overvaluation in the frame of Behavioral Finance.By developing a model of investor sentiment, we conclude that the offer price of IPO shares depends on the information about the intrinsic value of the company and investor sentiment. If noise traders are bullish at the time of offering,IPO shares are overpriced and the initial return increase with the intensity of noise trader sentiment prevailing at the time of offering. Positive initial return is the compensation for the risk of Lockup period,the rent offered to institutional is paid by the noise trader,who are ready to pay high prices for IPOshares. Based on the model ,it also show that IR is positively correlated with the volatility of sentiment at the end of Lockup period,and with the proportion of shares allocated to institution investor .In the primary market, applying cognitive theory in Behavior Finance to study the process of pricing inquiry , underwriters are affected by conservatism and anchoring biases. Influenced by the conservatism bias, original file range set by underwriters are narrower than it should be, and expected offer price are lower. Influenced by the anchoring and adjustment biases, underwriters make the middle of original file range as the preliminary anchor given excessive weight. Underwriters are only partially adjusted to the positive information acquired in the bookbuilding period, and the final offer price are close to the initial reference value. Secondly, it builds the econometric mode to test the weakening of the anchoring effect. Finally, it concludes that the bias of conservatism and anchoring are the factors of the abnormal initial return by regression analysis .