Skewness Preference and IPO Anomalies in China

Abstract

Due to investors’ unique structure and new transaction share rules, speculation in China’s IPO market prevails. In this paper, we investigate many anomalies in IPOs, concluding huge initial return, long-term return reversal and high turnover rate from the perspective of investors’ desire to gamble (skewness preferences). Based on Cumulative Prospect Theory, this paper theoretically and empirically verified that there is a significant impact on the first day and the long-term returns. Using all issued IPO between 2009 and 2012 as a study sample, the empirical results show that the increase of a standard deviation of skewness preference, and the first day returns increase 5.5%. Moreover, when the market environment is favorable, the positive sentiment of investors will make the effect of skewness preferences stronger. In the long run, the stronger the expected skewness is, the more negative the long-term risk premium is, and the lower the possibility of new shares that institutional investors continue to hold. In addition, skewness preferences across different industries, different financing scale, and different issue price has a significant difference.