Price Up-Limit and Divergence of Opinion on IPOs, Evidence from a Quasi Natural Experiment

Topic: Price Up-Limit and Divergence of Opinion on IPOs, Evidence from a Quasi Natural Experiment

Time: June 28th (Thursday), 10: 00 - 11: 30AM

Venue: Meeting Room 105, WENLAN

Speaker

Xiaping Cao, Ph.D Economics in Boston College, teacher in Sun Yat-Sen University

Finance Department, has published more than 10 papers in Journal of Financial Economics、Journal of Financial and Quantitative Analysis、Journal of Corporate Finance.

Research Interests 

Corporate Finance, Private Equity Funds, Venture Capital, Entrepreneurial Research, Financial Institutions Research

Abstract

Two stock exchanges in China imposed a new trading rule with price up-limit of 44% on the first trading day for IPOs after 2013. This event offers a quasi-natural experiment to test Miller (1977)’s theory of investor sentiment on asset pricing. We document that the trading rule significantly magnifies IPO underpricing and short-term price run-up. Initial trading shows a significant reduction with a pronounced divergence between big and small net buy. Post-IPO, the trading rule results in an upward shift of both turnover and volatility over next 6 months. The evidence suggests that the price up-limit restriction imposed by stock exchanges on IPOs exacerbates investment sentiment and widens divergence of opinion among investors.