Investor Sentiment and Pre‐IPO Markets

Abstract

We examine whether irrational behavior among small (retail) investors drives post-IPO prices. We use prices from the grey market (the when-issued market that precedes European IPOs) to proxy for small investors' valuations. High grey market prices (indicating overoptimism) are a very good predictor of first-day aftermarket prices, while low grey market prices (indicating excessive pessimism) are not. Moreover, we find long-run price reversal only following high grey market prices. This asymmetry occurs because larger (institutional) investors can choose between keeping the shares they are allocated in the IPO, and reselling them when small investors are overoptimistic. Copyright 2006 by The American Finance Association.

Short selling in initial public offerings☆

“…Tests of whether short selling is related to divergence of opinion (Miller, 1977;Derrien, 2005;Cornelli, Goldreich, and Ljungqvist, 2006;Ljungqvist, Nanda, and Singh, 2006) indicate that short selling is increasing in the level of the first-day return. While our results are consistent with the hypothesis that short sellers are attracted to IPOs with more divergence of opinion and hence, higher first-day returns, they are inconsistent with the notion that short selling constraints are the reason for high underpricing.…”

“…Dorn (2009), Aussenegg, Pichler, andStomper (2006) and Cornelli, Goldreich, and Ljungqvist (2006) examine pre-IPO markets that allow short selling and still find evidence that investor divergence of opinion is correlated with underpricing in the trading of IPOs. 12 Direct evidence on the costs of short selling is presented by D'Avolio (2002) and Geczy, Musto, and Reed (2002).…”

Are Investment Strategies Exploiting Option Investor Sentiment Profitable? Evidence from Japan

“…There are several studies of investor sentiment in the US. These include Solt and Statman (1988), DeLong et al (1990), Shleifer and Summers (1990), Lee et al (1991), Campbell et al (1993), Bodurtha et al (1995), Barberis et al (1998), Daniel et al (1998), Neal and Wheatley (1998), Fisher and Statman (2000), Shleifer (2000), Coval and Shumway (2001), Hirshleifer (2001), Antweiler and Frank (2004), Barberis et al (2005), Baker and Wurgler (2006), Bandopadhyaya and Jones (2006), Cornelli et al (2006), Kumar and Lee (2006), Edmans et al (2007), Tetlock (2007), amongst others. As none of these uses the PCR, comparable studies are limited, even internationally.…”

Investor Sentiment and IPOs Anomalies: An Agent-Based Computational Finance

“…Studies found that with short-sell constraints, individual investor's high sentiment is positively related to the first-day return and negatively related to the long-term performance of IPOs. These relationships suggest that high investor sentiment can push up the initial return, but as the sentiment gradually fades, it leads to a reversal of the long-term performance (Dorn, 2009;Cornelli, 2006;Tetlock, 2007). So, issuers tend to make use of the investors' optimism to make a high IPO price, but in order to make up for the loss of underwriters and institutional investors foreseeing by the early end of investor sentiment, they will reduce the issue price.…”