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IPO Underpricing of Chinese GEM:Based on Behavioral Finance Theory

Author: MengQuanYu
Tutor: JieChuanBo
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: Behavioral Finance IPO underpricing GEM Cognitive biases
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Type: Master's thesis
Year: 2013
Downloads: 185
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Abstract


IPO underpricing has been a national focus on the theoretical and the research subject. Comprehensive domestic and foreign research results show that most of the countries in the world of this phenomenon are found in the stock market and notable is that often the level of IPO underpricing in the developed countries is far below the developing countries. From the perspective of A-share market in China, the average IPO underpricing levels are almost remain in the forefront of the world. And the GEM (Growth Enterprises Market), as an emerging part of A-share market, its IPO underpricing rate is significantly higher than the motherboard market. And it has become a heart disease of China’s financial regulators and the majority of investors. So, what factors lead to the high IPO underpricing of China’s GEM market? It has become a major problem in the domestic theorists. Therefore, the study of this phenomenon has become a very important work to promote stable and healthy development of China’s GEM market.In this paper, based on the theories of behavioral finance, we assumed that the most important reason for the high IPO underpricing phenomenon of the GEM market in China from the cognitive biases of investors and irrational behaviors in the market. These psychological factors of investors in the IPO process bring too much noise trading in the market, which would push up the price after IPO. The main reason for that the GEM’s IPO underpricing rate is significantly higher than the motherboard market is that the GEM has the characteristics of high-risk and high return. And this feature makes heavy speculation investors, so it is easier to lead to the irrational behavior. Based on the theory of behavioral finance, overconfidence by investors in the GEM market, anchoring effect, over-reaction and insufficient and other aspects of cognitive biases, we select the related variables on the empirical research to explain the IPO underpricing. This paper is divided into five parts, and the main structure is as follows:The first chapter is the introduction part of the article which introduced the background and purpose of this research, a brief summary of the full text of the general framework, and presented the innovation points and deficiencies in the study.The second chapter is the part of literature review. The foreign economists generally analyze the IPO underpricing from different angles, and the most traditional research methods are divided into two categories:one is based on the information asymmetry between investors, issuers and underwriters; the other is based on the theory of information symmetry, believes that the IPO underpricing phenomenon is caused by the stock market itself. Although the theory of stock market in some developed countries has been good, but for the A-share market in our country, especially in the GEM, high rate of IPO underpricing phenomenon is very difficult to use traditional theory for perfect interpretation. So this paper attempts to use the behavioral finance theory to research this phenomenon of GEM.In the third chapter, we introduced the basic content of behavior financial theory, and scholars from all over the world by behavioral finance theory to analyze the IPO underpricing phenomenon.The fourth chapter is the main part of this article. To set up the GEM market in China for more than three years of all355stocks as sample, and based on the assumption of relevant behavioral finance, we use the Eviews software for all variables in regression analysis. Finally we concluded the empirical results of explaining variables for IPO underpricing rate.The last chapter summarized that the irrational behavior of investors for the IPO underpricing in the GEM market in China has an important impact for the healthy and stable development of China’s GEM market. So we put forward the proposal for the investors, regulators, issuers and underwriters.

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