Abstract:Most research explains underpricing of initial public offerings (IPOs) as the rational response of investors to the valuation uncertainty and the existence of informational friction in the IPO market. In contrast, Miller (1977) demonstrates that irrational sentiments of optimistic investors lead to high underpricing which pessimistic investors are unable to correct due to short selling constraints. Using first day flipping ratio and the trading ratio as proxies for divergence of opinion, we provide evidence c… Show more
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