Abstract: Based on private information of institutional investors at the primary market and sentiment of retail investors at the secondary market, a model is developed to investigate the micro-mechanism of IPO overpricing or underpricing under the background of China's IPO market. The results of the model show that: whether IPO overpricing or not depends on retail investor sentiment mainly, rather then private information of institutional investors, meanwhile the more optimistic of the retail investor sentiment, the less likely of IPO overpricing. Moreover, IPO first-day return is positively related to retail investors' sentiment and is negatively correlated to institutional investors' private information. The model is tested by using 477 IPOs disclosing investor' bids in Shanghai and Shenzhen Stock Exchange from November 2010 to December 2013. It is found that empirical evidence in support of the model. Empirical results can provide some revelation about how to improve IPO issue efficiency.

Key words: institutional investor, private information, retail investor sentiment, IPO first-day return