The Empirical Research And Prospect Ofinitial Premium And Long-term Underperformance Of Ipo Stocks

The phenomena of initial premium and long-term underperform are commonly appeared and widely concerned in China A-share market. We introduce the theoretical research framework based on Underperformance Function, which also incorporates the effects of linear regression models on different benchmarks and different means of cross-sectional averaging. We also summarize appropriate advices to methodology choices.Based on the panel data with large sample size, long time period and high interval frequency derived from IPO stocks listed from 2009 to 2012, we take hypothesis tests and significance analyses by using statistical methods. We obtain empirical estimate results and confidence levels of Underperformance Function and Cumulative Underperformance Function, and observe cross-sectional correlations with first-week returns. On the significance level of 0.01, we find IPO stocks have significant behavioral patterns: long-term underperforming respective sector benchmarks during first 112 weeks after IPO listing, with negative correlations to first-week returns; differing performance from respective sector benchmarks within 1-week, 3-month, 1-year and 3-year time windows after IPO listing, with significant correlation to first-week returns. From the vision of behavioral finance, we recognize that these behavioral patterns are closely connected to restricted share circulation. Combined with both quantative analysis and qualitative analysis, our empirical researches not only show intuitive and meaningful research conclusions, but also reveal empirical laws which are generally applicable.Incorporating the researches on theory and on system, consideration and suggestion are proposed to China IPO system, while analysis and prospect are issued to IPO system reformation in the beginning of 2014. Furthermore, other various empirical researches could be constructed on Underperformance Function-based research framework, which would be meaningful for academics, practitioners and regulatory administrators to recognize, comprehend and increase the capital market efficiency for IPO stock listing.