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Empirical Research of IPO Excess Return in GEM Market: Analysis Based on Behavior Finance

Author: LinXiaoFei
Tutor: DingLi
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: IPO underpricing GEM Behavioral Finance Investor sentiment
CLC: F832.51
Type: Master's thesis
Year: 2011
Downloads: 261
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Abstract

In this paper, the object of study is the first day of the GEM IPO excess returns phenomenon and this phenomenon causes or factors. Is connected to an IPO and secondary markets a very important part, but in the country's IPO market generally there first day of IPO excess returns of the phenomenon. First day of IPO excess return phenomenon is commonly referred to as high IPO underpricing phenomenon, refers to the first day of IPO's closing price is much higher than the IPO price, making the purchase and successful investors participating receive more than the average market rate of return phenomenon. This phenomenon is very common in a mature stock market, the first day of IPO excess returns generally not more than 20%, the emerging stock market excess returns the first day of the new shares is normally 40% -80%, China's securities market the first day of the new shares on the excess return is abnormally high. China's GEM since 2009 October 23 ceremony held on board, approved the first batch of 28 GEM companies will be held October 30, 2009 listed in the Shenzhen Stock Exchange trading. This marks have been preparing for nearly a decade GEM officially open. However, only one year is the establishment of GEM, its new stock has repeatedly been stir-fried, listed on the first day yield is very high, the first batch of 28 companies listed on the first day have suffered varying degrees of sensation, which has 10 of the first day of IPO excess returns in excess of 100%, far higher than the market's average yield. High GEM IPO underpricing is a great harm, such as high GEM IPO underpricing IPO market loss making capital allocation function, leading to the motherboard market and GEM funds in the market imbalance, leading to a capital market and the secondary market separation, and makes large institutional investors and making new shares on GEM will be because low-risk and high-yield investment will be a lot of money to carry out illegal operations, pulled the stock, so the majority of the interests of small investors have a lot of damage. Therefore, we can say that there are many systems are not mature, China's GEM market is still a very long way to go, how will the Chinese culture as an American GEM NASDAQ This requires our joint discussions and efforts. On the first day of IPO shares Reasons of excess returns from the 1970s began, summed up roughly divided into two stages. The first stage is in the traditional finance theory and theoretical framework, based on secondary market fully effective under the premise that the parties involved in the IPO issue price of new shares deliberately suppressed caused IPO underpricing phenomenon. This theory represents the early scholars explain IPO underpricing. The second stage is in behavioral finance theory and framework for investor cognitive biases and psychological bias, the first day of secondary market excess return is due to the intrinsic value of the stock caused by positioning errors. In the framework of the traditional finance high IPO underpricing reason for the study is mainly asymmetric information theory point of view, another small part is based on information symmetry theory perspective. Asymmetric information theory about the high IPO underpricing can be explained from the following aspects: (1) between the issuer and the underwriters of information asymmetry, also called principal-agent theory. Publisher theory relative to the underwriters for the IPO pricing information disadvantage in the party, the underwriters will be the success of the IPO market in order to go out and deliberately suppressed in order to avoid the issue price of new shares issued to fail. (2) the underwriters and the information asymmetry between investors, this theory suggests investors with respect to the information disadvantage position underwriter, underwriters in order to obtain more information about the new demand letter Kai, you must give informed investment by a price discount, and thus a high IPO underpricing. (3) between the investor and the investor information asymmetry. This theory-informed investors better than the non-informed investors can screen out IPO shares gain, rather than purchase risk-informed investors may face, and slowly will reduce the purchase and withdraw from the market, in order to retain the issuer of such non-informed Investors will take the issue of IPO underpricing way to compensate for the risk purchase. (4) between issuers and investors, information asymmetry. This theory proposes issuer than investors better understand their own company, they chose the one hand, because of the stock issued at a discount to compensate investors in the IPO company information such uncertainty, partly because high-quality companies in subsequent financing issued at a discount to make up for the loss of their own for the first time, so the company will put this IPO issued at a discount as the company has a high-quality characteristics of the information communicated to investors. Information symmetry theory about the high IPO underpricing interpretation is relatively less, there are two main explanations: (1) regime, this theory due to certain institutional arrangements, the underwriter is to avoid litigation and to maintain underwriters reputational and other considerations before taking the IPO issued at a discount policy. (2) The explanation of ownership structure, this theory is from the optimization of structural aspects of investor. For example in order to avoid being a minority shareholding company, was hostile takeover, so the stock issued at a discount to attract small investors, but also for example in order to enhance the liquidity of the stock and take the cheap haircut strategy and such optimization is to attract strategic investors ownership structure and issued at a discount. Based on the framework of behavioral finance high IPO underpricing explanations based on the study on the main investor psychology and behavior. There are speculative bubble hypothesis, hypothesis, and so to follow suit. China's IPO underpricing than the world average is much higher, which caused to the attention of Chinese and foreign scholars, it was discovered that the course of development of the stock market are different, government regulation and other differences, the West underpricing theory is not entirely suitable for the interpretation of Chinese market, combined with foreign theories, Chinese scholars have proposed a number of explanations Chinese IPO underpricing theories, such as administrative control caused by the high underpricing, because Chinese investors excessive speculation, big money clients and institutional investors, insider trading stock manipulation and other research results. For China's GEM IPO, it has a different number of rules and the motherboard, such as the requirement for listed companies much lower, however, the SFC GEM risk aversion requirements are very strict. In the subsequent disclosure of information and trading rules, the Commission's requirements for GEM is clearly much higher than the motherboard, such as the introduction of more stringent delisting system, strict control of cash to shareholders acts listed on the first day of the \\This article is mainly used behavioral finance theory established more than a year of high GEM IPO underpricing reasons explained. Specifically profiling from three aspects: (1) an inadequate response and overreact. This theory suggests that investors in investor sentiment with overconfidence on GEM IPO investment decisions, most investors will issue new shares to GEM characterized as good, if good news about the new benefit will strengthen investor judgment, causing an overreaction, but if there is bad news, investors will go to dilute or ignore this bad news does not go according to correct this negative characterization of good news that they have to generate a new bearish inadequate reaction to the news. GEM IPO market, the good news is reflected excessive, but bad news will be submerged in a positive news, the investor hysteria and overconfidence will cause the first day of the excess returns. (2) anchoring mentality and frame dependence. The theory is that the GEM IPO investors have the impression that the first day of high-yield deeply occupied in the heart, but do not want to spend a greater cost to dig information on the risks do not mind, even if there is bad news also hold indifferent attitude. GEM IPO market, this is often exploited by the underwriters, the underwriters in the expression of good or bad news when using different formulation strengthening good news and earnings, dilute the bad news and risk and without the risk of implant information effectively , making it easy for non-rational investors forming the frame dependence. Based on the above theoretical analysis, this paper collected from October 30, 2009 listed on the first batch of GEM companies to February 2011 GEM listed companies until 168 sample data, to carry through software Eviews5.0 multiple regression analysis using weighted least squares estimation method, GEM 168 companies for data for statistical analysis. This data comes from the National Information Technology Development Co., China Taian CSMAR series stock market research database, the Shenzhen Stock Exchange market statistics yearbooks and CHINF. Based on the literature review and theoretical analysis of a selected explanatory variables ie the first day of IPO excess returns IR, six explanatory variables are: the earnings release PE, issued and outstanding shares of the scale Scale, ROE growth ROEI, hands rate Turnover, the success rate Lotrate, before the release of the 5th market average yield Yield. Empirical results show that the issue size and ROE growth rate over the first day of the issuer yield no significant impact, and the other four variables on the dependent variable has a significant impact. Therefore, the results indicate that investor sentiment on the first day of the GEM IPO excess returns have a major impact. Early High IPO underpricing and the first day of high yield investors formed the anchoring effect and frame dependence, purchase of new shares that can be obtained without the risk of high-yield, while allowing investors in the IPO market overreacted positive, while negative reaction on the lack of herd mentality of investors on the secondary market has also caused a collective blind optimism for the new shares, so investors in IPOs irrational behavior is caused by irrational fanaticism IPO excess returns of the important reasons. From the theoretical and empirical analysis of the results, we draw two policy recommendations, proposed to correct for individual investors as well as guidance and education of the GEM Listing on the first day of the \From what then correct. Innovation of this paper mainly in three aspects: First, the study was only established less than two years of high GEM IPO underpricing on Chinese GEM IPO empirical studies also small. Second, the introduction of explanatory variables when the growth of the GEM features introduced ROE growth. Third, the introduction of a new investor sentiment reflects quantitative indicators that the market of pre-IPO average yield of 25 paper also obvious inadequacies in the verification GEM IPO underpricing is high because of investor sentiment on the secondary market caused, the general sample data to test whether the long-term weakness, but because of the establishment of GEM life is very short, short window of time, with more than one year listing period sample data rarely, this small amount of data can not be representative of the sample data, so there is no long-term existence of weak inspection.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial market
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