Volume 29, Issue 4, 2020
DOI: 10.24205/03276716.2020.865
Impacts of Investor Sentiment and Price Limit Rules on IPO Returns
Abstract
The price limit rules on the first day of IPO new shares started implementing since 2013 in China. The essence of the rules is to prevent and control speculation on new shares, safeguard normal trading order, and protect investors’ legal rights and interests in China. However, the price limit rules violate the efficient market hypothesis which may encourage the speculative trading behaviors and cause the prices of the new shares in IPO market difficult to predict. Therefore, this study emphasizes on analysis of the impact of investor sentiments and price limit rules on the IPO returns in China. Meanwhile, this study distinguishes the sentiment of the individual investors and the sentiment of the institutional investors to verify the impacts from different types of investors. The results show that the sentiment of the institutional investors has a significant impact on the first-day return of IPO shares after the implementation of the price limit rules. The results of this study provide important enlightenments for the practice of the improvement in China's IPO market. The uncertainty and complexity of investors’ behaviors are the factors that policymakers must consider to avoid the speculative trading behaviors in the market.
Keywords
price limit regulation, IPO returns, institutional investor sentiment, individual investor sentiment