The Impact Of Investor Sentiment On The Long-Run Underperformance Of New Stocks

Initial public offering(IPO)refers to the first time an enterprise sells its shares to the public.It is accompanied by three anomalies,which are called "IPOs puzzles" by the academic community.They are:(1)the short-run underpricing,that is,the closing price on the first day of IPO is higher than the issue price;(2)the Long-run underperformance,that is,the long-run performance of new shares after listing is weaker than the market;(3)the hot-issue market,that is,the number of IPOs has surged in a certain period of time.The above phenomenon is particularly prominent in China.The new shares listed in China generally have the following characteristics:extremely high IPO underpricing and long-run underperformance.The signal hypothesis,rationing theory and information asymmetry theory based on the Efficient Markets Hypothesis can explain IPO underpricing,but it is difficult to answer the Long-run underperformance problem.The reality that the lottery winning rate of new shares is extremely low and the turnover rate on the first day of listing is extremely high in China’s stock market and the rise of behavioral finance theory encourage Chinese scholars to start to study IPO underpricing and long-run underperformance from the perspective of irrational investors.However,studies about the relationship among investor sentiment,IPO underpricing and longrun underperformance are few.The IPO underpricing and long-run underperformance seem to be contradictory.This paper intends to reconcile the two through the irrational theory of investors.This paper intends to use the listed companies from 1996 to 2019 as samples,construct investor sentiment indicators as explanatory variables,construct long-run performance indicators as dependent variables,and introduce IPO underpricing into it to explore the impact mechanism between investor sentiment and long-run performance.This paper puts forward the following hypotheses: Hypothesis 1:China’s new shares have a long-run underperformance;Hypothesis 2: investor sentiment has a significant negative impact on the long-run performance of new shares,that is,the higher investor sentiment,the worse the long-run performance of new shares;Hypothesis 3: IPO underpricing plays an mediation role in the impact of investor sentiment on the long-run performance of new shares.The research methods of this paper are as follows: First,for investor sentiment,the principal component analysis method(PCA)is used to construct individual stock sentiment indicators;Second,for long-run performance,the event study method and calendar time method are used to construct long-run performance indicators from different perspectives;Third,the regression method is multiple linear regression(OLS);Fourth,The three-step method,Sobel test and Bootstrap method are used to test the mediation effect.The empirical results of this paper show that: First,China’s new shares have a long-run underperformance for at least three years;Second,investor sentiment has a significant negative impact on the long-run performance of new shares.The higher investor sentiment is,the worse the long-run performance of new shares is;Third,IPO underpricing plays a partial mediation role in the impact of investor sentiment on long-run performance.The main innovations of this paper are as follows: First,Index construction.For the construction of investor sentiment index,this paper uses multiple relevant indicators such as oversubscription ratio,turnover rate,and the highest price on the first day to build a comprehensive index through the principal component analysis method.The introduction of the highest price on the first day is the first time,avoiding the disadvantages of using a single index in previous literature;For the construction of long-run performance indicators,different from the previous literature,this paper uses a variety of methods to construct indicators,which further confirms the existence of long-run underperformance,and also avoids the lack of persuasiveness that may result from using a single method;Second,Mechanism research.The previous literature lacks the research on the impact mechanism between investor sentiment and long-run underperformance.This paper innovatively introduces IPO underpricing into it,making a beneficial contribution to the research of "IPOs puzzles" in China’s stock market.Third,Mediation effect test.Most of the previous documents use the three-step method.This paper uses the Sobel test and Bootstrap method on the basis of the three-step method,which enhances the credibility of the results of the Mediation effect test.