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Behavioral finance analysis on IPO underpricing phenomenon in China

Author: ZhengYunFei
Tutor: SunLiJian
School: Fudan University
Course: Finance
Keywords: Under pricing IPO Noise Trader Irrational investor
CLC: F832.5
Type: Master's thesis
Year: 2012
Downloads: 175
Quote: 0
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Abstract


Both domestic and overseas researches have proved that no matter in an emerging capital market or in a mature capital market, the topic of the prices of Initial Public Offering are commonly lower than the price of the stocks’real value of its holding company. This issue is publicly renamed as the initial public offering under price issue. Since the very beginning of this problem had been discovered, experts have been paying immense interest in this study issue. Financial researches both in china and foreign countries have revealed many theories and hypothesis to explain the puzzle of initial public offering under pricing.Researches have proved that individual investors’irrational actions are quite common among the participants in the capital market. And when it comes to the issued of initial public offering, investors would show irrational emotions when betting on the new issued stocks. These behaviors are also referred to as biased cognitive behavior. When these irrational actions take place, a large amount of irrational investors would bid higher prices than the initial public offered stock actually worth. These irrational actions have been partly studies in the research of behavioral finance.It is a matter of fact that foreign researchers have done great jobs in explaining the cause and background of the issue of initial public offering under pricing. Yet from our common senses we can conclude that china’s, or emerging countries financial markets are quite different from foreign ones, for they have incomplete surveillance system, and the participants in the market are more lack of professional train of investment knowledge so as to behave irrationally when participating in the financial activities, especially when they gamble in the IPO market.In this paper we use Shanghai and Shenzhen stock markets IPO sample from2000to2011to study whether under pricing exists in our financial market, then we focus to study what are the causes behind it. We found that the institutional participants, such as the listed company and the IBs seems to act effectively when pricing the stock, then we do more research to show that the individual investors’irrational behaviors cause the under pricing problem.The discussion of this under pricing problem has it reality meanings. The conclusion that the main determination factor of IPO under pricing are from irrational behavior of individual investors indicates in order to improve the effectiveness of financial market, it is essential to enhance the education of investors to help them to make rational investing decisions.

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