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Hot Markets, Investor Sentiment and IPO Pricing

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Author Info
Ljungqvist, Alexander P
Nanda, Vikram
Singh, Rajdeep

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Abstract

Our model of the initial public offering process links the three main empirical IPO ‘anomalies’ – underpricing, hot issue markets, and long-run underperformance – and traces them to a common source of inefficiency. We relate hot IPO markets (such as the 1999/2000 market for Internet IPOs) to the presence of a class of investors who are ‘irrational’ in the sense of having exuberant expectations regarding future performance. Underpricing and long-run underperformance emerge as underwriters attempt to maximize profits from the sale of equity, at the expense of these exuberant investors. Underpricing serves to compensate regular IPO investors for their role in restricting the supply of available shares and maintaining prices. The model is shown to be consistent with many aspects of the IPO process. It also generates a number of new empirical predictions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3053.

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Date of creation: Nov 2001
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Handle: RePEc:cpr:ceprdp:3053

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Related research
Keywords: behavioural finance; hot issue markets; initial public offerings; long-run performance;

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Find related papers by JEL classification:
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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  3. Ljungqvist, Alexander P & Wilhelm Jr, William J, 2001. "IPO Allocations: Discriminatory or Discretionary?," CEPR Discussion Papers 2855, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  27. Brav, Alon & Gompers, Paul A, 1997. " Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies," Journal of Finance, American Finance Association, vol. 52(5), pages 1791-1821, December. [Downloadable!] (restricted)
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  32. Habib, Michel A & Ljungqvist, Alexander P, 2001. "Underpricing and Entrepreneurial Wealth Losses in IPOs: Theory and Evidence," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 14(2), pages 433-58.
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  33. Laurie Krigman & Wayne H. Shaw & Kent L. Womack, 1999. "The Persistence of IPO Mispricing and the Predictive Power of Flipping," Journal of Finance, American Finance Association, vol. 54(3), pages 1015-1044, 06. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Qiao, Yongyuan, 2008. "Analysis into IPO underpricing and clustering in Hong Kong equity market," MPRA Paper 7876, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Cécile Carpentier & Jean-François L'Her & Stephan Smith & Jean-Marc Suret, 2007. "Risk, Timing and Overoptimism in Private Placements and Public Offerings," CIRANO Working Papers 2007s-27, CIRANO. [Downloadable!]
  3. Jean Helwege & Nellie Liang, 2003. "Initial public offerings in hot and cold markets," Finance and Economics Discussion Series 2003-04, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Michael Stolpe, 2004. "Non-Market Interaction in Primary Equity Markets: Evidence from France and Germany," Kiel Working Papers 1211, Kiel Institute for the World Economy. [Downloadable!]
  5. Silvia Rossetto, 2008. "The price of rapid exit in venture capital-backed IPOs," Annals of Finance, Springer, vol. 4(1), pages 29-53, January. [Downloadable!] (restricted)
  6. Vicente Pons-Sanz, 2005. "Who benefits from IPO underpricing? Evidence form hybrid bookbuilding offerings," Working Paper Series 428, European Central Bank. [Downloadable!]
  7. Ljungqvist, Alexander & Boehmer, Ekkehart, 2004. "On the decision to go public : Evidence from privately-held firms," Discussion Paper Series 1: Economic Studies 2004,16, Deutsche Bundesbank, Research Centre. [Downloadable!]
  8. Matt Pritsker, 2005. "A Fully-Rational Liquidity-Based Theory of IPO Underpricing and Underperformance," Computing in Economics and Finance 2005 414, Society for Computational Economics. [Downloadable!]
  9. Richard J. Rosen, 2004. "Merger momentum and investor sentiment: the stock market reaction to merger announcements," Working Paper Series WP-04-07, Federal Reserve Bank of Chicago. [Downloadable!]
  10. Matthew Pritsker, 2006. "A fully-rational liquidity-based theory of IPO underpricing and underperformance," Finance and Economics Discussion Series 2006-12, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  11. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," NBER Working Papers 13189, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. 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)
  13. Xiaoqiong Cai & Guy Liu & Bryan Mase, 2008. "The long-run performance of initial public offerings and its determinants: the case of China," Review of Quantitative Finance and Accounting, Springer, vol. 30(4), pages 419-432, May. [Downloadable!] (restricted)
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