The Impact Of Investor Sentiment On IPOs’ Return

The IPO stocks always have high first day closing price and poor long-term performance. Previous studies interpret the high first day closing price from the aspect that the offering price is underestimated. But there is no evidence which show that the offering prices of IPOs in our securities market are underestimated. There is information asymmetry on IPO market which leads to irrational decision of investors. This paper studies the influence of investor sentiment on the short-term and long-term performance of IPO.The paper first use stochastic frontier analysis to break the explanation that IPOs’ offering prices are underestimated, and this is the foundation of studies of the influence of investor sentiment on the return of IPOsThen the author chooses5indexes including number of IPOs, new investors’ accounts, consumer confidence index, amount of transaction/circulated stock value, the discount of closed-end fund as primitive indexes and use principal component analysis to construct a investors sentiment composite index.The paper uses the investors sentiment composite index to explain IPO first day return and finds that when investor sentiment is high, so does the first day return and vice versa. In the long term, the influence of investor sentiment is declining while the influence of market return is rising.The research meaning of the paper can be listed as follows:helping us to understand the behavior of investors and providing guidance of investment decisions; adding investor sentiment into the studies of IPOs returns and providing an explanation of IPOs high first day return and low long-term return; providing a new direction of studying IPOs.