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Skewness Preference and IPO Anomalies in China

Wei Tang (), Tianhao Wu () and Liheng Xu ()
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Wei Tang: School of Economics, Fudan University
Tianhao Wu: Department of Statistics, Yale University
Liheng Xu: School of Economics, Fudan University

Annals of Economics and Finance, 2017, vol. 18, issue 1, 173-199

Abstract: Due to investors' unique structure and new transaction share rules, speculation in China's IPO market is common. In this paper, we investigate many anomalies in IPOs that produce 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 first day and 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 5.478%. 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.

Keywords: Skewness Preference; Expected Skewness; Idiosyncratic Skewness; Anomalies of IPO (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2017
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