IPO Pricing and the Relative Importance of Investor Sentiment - Evidence from Germany

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Abstract:The underpricing phenomenon of Initial Public Offerings (IPOs) has been widely studied across different stock markets around the world and has often been explained to be as a result of asymmetrically distributed information and ex-ante uncertainty. However, as Ritter and Welch (2002) argue to the contrary, these theories are unlikely to explain the persistent pattern of high initial returns during the first trading day as well as other features of the returns data. This paper add some further alternative explanations to the traditional theory while focusing on German IPOs during the 1997 to 2001 period and covering a sample of 410 firms. Using time series regressions the cyclical behaviour of the issue activity is examined and we report, using VAR analysis, that lagged underpricing and IPO volume influence the decision to go public. The cross-sectional regression analysis, using both censored and uncensored data, shows that the initial returns are mainly influenced by investor sentiment and demand, and less by ex-ante uncertainty, especially during the dot-com boom.JEL Classification: G10, G12, G24, G32 IPO Pricing and the Relative Importance of Investor SentimentEvidence from GermanyRevised Version, July 2004 Abstract:The underpricing phenomenon of Initial Public Offerings (IPOs) has been widely studied across different stock markets around the world and has often been explained to be as a result of asymmetrically distributed information and ex-ante uncertainty. However, as Ritter and Welch (2002) argue to the contrary, these theories are unlikely to explain the persistent pattern of high initial returns during the first trading day as well as other features of the returns data. This paper add some further alternative explanations to the traditional theory while focusing on German IPOs during the 1997 to 2001 period and covering a sample of 410 firms. Using time series regressions the cyclical behaviour of the issue activity is examined and we report, using VAR analysis, that lagged underpricing and IPO volume influence the decision to go public. The cross-sectional regression analysis, using both censored and uncensored data, shows that the initial returns are mainly influenced by investor sentiment and demand, and less by ex-ante uncertainty, especially during the dot-com boom JEL Classification: G10, G12, G24, G32

The Impact of Investor Sentiment on the German Stock Market

“…For example, Loughran and Ritter (1995) state that corporate executives time their IPOs to take advantage of fluctuations in investor sentiment. Similar evidence for Germany is provided in Oehler, Rummer, and Smith (2005). As a measure for IPO activity we simply compute the number of IPOs in a given month, IPO-Num m .…”

An Empirical Examination of IPO Underpricing Between High-technology and Non-high-technology Firms in Taiwan

“…When investors are overoptimistic, issuing firms should profit from this period and are incited to offer large IPO volumes because they are highly certain that the large volume of shares will be absorbed by sentimental investors (and vice versa). Oehler, Rummer, and Smith (2005) document that IPO IRs are mainly influenced by investor sentiment. Using grey-market prices of European IPOs as a proxy for the sentiments of retailer investors, Cornelli, Goldreich, and Ljungqvist (2006) observe that this sentiment measure can predict the first-day aftermarket prices of IPOs in favourable situations but not in unfavourable situations.…”

Long-Term Effect of IPO Underpricing on Aftermarket Liquidity

“…When a company has good profitability, a lot of investors tend to be drawn to the company, therefore increasing the demand for the company's shares. High demand for IPO could result in a higher degree of underpricing (Rummer et al 2004). In addition, it could also result in the increase of offering price in the secondary market (Purbarangga and Yuyetta 2013).…”