Abstract: Frequent IPO overpricing makes investor sentiment and investment strategy become the focus of behavioral finance theory in China′s capital market. This paper selects 654 A-share listed companies from 2010 to 2012 in Shanghai and Shenzhen market as samples, analyzes the proportional change in shareholders number and the shareholding proportion of institutional investors before and after IPO, and examines investors′ reaction to IPO overpricing. The study finds that IPO overpricing makes medium and small investors do excessive reaction because of representativeness bias, loss aversion and regret aversion, and institutional investors also overreact due to overconfidence from the advantages of information superiority and technical experience; the investors′ overreaction makes withdraw shareholders more than entry shareholders so that the shares with IPO overpricing face a new round of a major reshuffle of shareholders under the condition that their shareholders number and proportion of institutional investors become less.

Key words: IPO Overpricing, behavioral finance；investor sentiment, market response