We study the link between underpricing of initial public offerings (IPOs) and index excess returns in secondary markets. We use a theoretical model to argue that underpricing of IPOs raises investors’ attention and, thereby, triggers investments in secondary markets. Our theoretical model implies that such investments should give rise to positive index excess returns in secondary markets. The results of our empirical tests, based on a dataset of stocks from the Neuer Markt and the Nouveau Marché, are in line with the implication of our theoretical model.
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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number
1259.