The Influence Of Investor Sentiment To IPO First-Day Abnormal Initial Return In China

In the1960s, many financial scholars found the phenomenon of Abnormal Initial Return (AIR) in various capital markets, and in the following years this phenomenon became one of the hot issues in Finance area attracting lots of scholars obsessed in it. For all researches on the reason of AIR, including two theories, one is Underpricing theory, which means in the primary market the securities underwrite pricing the securities lower than its true value, so the AIR of IPOs comes from the balance between issuing price and true value. Another is Overvaluation theory, which means the securities’price in the secondary market is higher than its true value, in that way AIR comes from the secondary market. Based on these two theories, this paper focuses on the reason of high abnormal initial return in Chinese initial public offering capital market,In China, early domestic scholars thought the high AIR in Chinese capital market came from our unique stock issuing system and monitoring system. After several reformations, since2006, Book-building Mechanism is used in IPOs issuing, but the AIR still keeps high. Based on Stochastic Frontier Analysis (SFA), we use673kinds of stocks as researching samples, issuing from06/01/2006to12/30/2011in Shanghai and Shenzhen Stock Exchange, to test the pricing efficiency in Chinese IPO primary market. The result shows pricing efficiency is99.93%that means after using Book-building Mechanism IPO stock pricing in primary market is reasonable, seems Underpricing theory doesn’t make sense, we need to find the reason of high AIR in secondary capital market.IPOs Overvaluation theory belongs to Behavioral Finance, which assume the secondary capital market was inefficient that means noise traders (including exuberant investors and positive feedback investors) in the market will falsely evaluate IPO stocks according to noise information and we call this kind of cognitive and behavioral deviation,"Investor Sentiment". In another way, we could say investor sentiment push the trade price of IPO stock high. Every opinion needs theories to support, in this case "Overconfidence Theory","Regret Theory""Overreaction Theory" and "Prospect Theory" can explain the way how investors’ sentiment influent stock price, also Miller Model, DHS Model and DSSW Model can give reasonable explanations in the model aspects.Besides theories and models, we also need to do the empirical analysis in order to confirm our opinion. So we selected the same samples as we do in the SFA, using multiple linear regression analysis, to confirm investors’sentiment is the key reason of high AIR in Chinese IPO market. Because it is very hard to measure investors’sentiment, we use proxy variables as alternative variables, which including APE, AOIR, BM, FDTR, IPOMOM, LOTRT and CT. The empirical result shows that investors’sentiment has significant positive correlation with high AIR, and compared with positive feedback investors, exuberant investors make main contribution to high AIR, in addition, we also found the stocks in small and medium-board market have higher rate of AIR than that in the main-board market. So the empirical analysis confirms our opinion that investor sentiment is the key reason of high abnormal initial return in Chinese initial public offering market.