IPO Long-run Underperformance On Chinese Stock Market And The Explanation Based On Heterogeneous Beliefs

IPO long-run underperformance is one of the IPO anomalies, there is not confirm conclusion that whether IPO long-run over-performance or underperformance in the recent literatures. Why there are arguments? It is because different literates used different sample data, calculation methods and adjusted benchmark to analyze the IPO long-run performance. After review literatures about IPO long-run performance, this paper choose the sample includes 861 Shanghai A-stocks IPOs, during the period from January 1992 to April 2004, using Shanghai A-stock index as the matched benchmark. The methods this paper used to calculate IPO long-run abnormal return are Cumulative Mean Abnormal Return, Buy and Hold Abnormal Return, CAPM model, Fama-French three factors model. After the experience analysis, this paper finds that the IPO stocks have significant lower long-run return than benchmark return in the same research period which is three years after IPO. The results tell us that IPO long-run underperformance on Chinese stock market.For analyzing how the IPO long-run underperformance accrue on Chinese stock market. This paper discusses the relationship between investor heterogeneous beliefs and IPO long-run underperformance in the view of behavior finance. Firstly, this paper constructs two indexes which are residual volatility and adjusted IPO first day turnover as proxy indexes for investor heterogeneous beliefs. Then, build the experience models include control variables such as issue size, P/B, P/E, IPO initial return, underwriter, pre-IPO market index return and so on, which eliminate the effects of non-heterogeneous beliefs. The regression results tell us that the coefficient on heterogeneous beliefs is significant negative, which means that it is negatively related to IPO long-run abnormal return; so, more disagree about heterogeneous beliefs, worse IPO long-run underperformance, which consistent with Miller(1977)'s hypothesis.The last part of this paper point out that the conclusions of this paper are propitious to guide investors to design more efficient invest strategies, promote the development of market structure and market institutions, ask companies to public more information, reduce investors heterogeneous beliefs, and increase the IPO market efficiency.