Migration of Retail Investors during Underpriced IPOs: Evidence from the Chinese Stock Market

Abstract

This study further develops attention-grabbing theory by classifying attention-grabbing sources into common events and isolated events. Then it focuses on underpriced IPOs, a specific kind of common event. To explore their effects on retail investors’ limited attention, I propose the Retail Investors Migration (RIM) model with three mechanisms, i.e. (i) migration of attention (shifting limited attention to new stocks); (ii) migration of herds (following others blindly to trade new stocks); and (iii) reduction in positive feedback. The RIM model has a counterintuitive prediction that market volatility would be lower, not higher, during “Online Issuance Day” and “First Trading Day,” which are the two major milestones in an IPO underpricing event. This surprising finding is then empirically verified by data from the Chinese stock market where retail investors are most concentrated. It is also shown that recurring migration occurs after underpriced new stocks have been traded for several days. Besides, background information and key statistics about the Chinese primary market are presented in detail.

(The paper may be available upon request)