Economic policy uncertainty, investor sentiment and IPO underpricing

Based on the data of listed companies on the ChiNext and the Science and Technology Innovation Board (STAR Market) after the registration-based IPO system reform in 2019, this paper empirically investigates the impact of economic policy uncertainty (EP) on IPO underpricing rates and its underlying mechanisms. Using a sample of STAR Market companies that conducted IPOs through the registration-based system from July 22, 2019, to December 31, 2023, and by constructing benchmark regression models and mediation effect models, we find that economic policy uncertainty is significantly negatively correlated with IPO underpricing rates. That is, when economic policy uncertainty increases, the first-day return on new stock listings significantly decreases. Further analysis shows that investor sentiment plays a mediating role in the impact of economic policy uncertainty. Specifically, rising economic policy uncertainty dampens investor enthusiasm, manifested as a decrease in the first-day turnover rate and an increase in the lottery rate, thereby reducing IPO underpricing rates. Heterogeneity analysis reveals that the negative impact of economic policy uncertainty on IPO underpricing rates is more pronounced for small and medium-sized enterprises (SMEs), possibly because they face higher financing constraints and market risks and are more sensitive to policy changes.