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Investor Sentiment and Pre-IPO Markets

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Author Info
FRANCESCA CORNELLI
DAVID GOLDREICH
ALEXANDER LJUNGQVIST

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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.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2006.00870.x
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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 61 (2006)
Issue (Month): 3 (06)
Pages: 1187-1216
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Handle: RePEc:bla:jfinan:v:61:y:2006:i:3:p:1187-1216

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  1. Renneboog, L.D.R. & Spaenjers, C., 2008. "The Dutch Grey Market," Discussion Paper 2008-88, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  2. Ravi Jagannathan & Ann E. Sherman, 2006. "Why Do IPO Auctions Fail?," NBER Working Papers 12151, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Maria Borges, 2007. "Underpricing of Initial Public Offerings: The Case of Portugal," International Advances in Economic Research, Springer, vol. 13(1), pages 65-80, February. [Downloadable!] (restricted)
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This page was last updated on 2009-12-8.

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