Asymmetric Information, Noise Traders and Chinese IPO Initial Returns

While the initial return of IPOs (Initial public offers) is a long argued anomaly, the view of IPO being underpriced is doubted by some empirical researches with the discovery of IPOs´ overpricing. By introducing the impact of noise traders in IPO events and considering the two types of factors of asymmetric information and noise traders together, this paper systematically explained the abnormal initial return of IPOs. The findings suggest that both of the two factors can explain the so high initial return of IPOs in China, but only the factor of noise traders is the exactly main. Further, the positive feedback traders can also explain it well as the sentiment investors focused by previous studies.