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Investor Sentiment and Pre-IPO Markets

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  • FRANCESCA CORNELLI
  • DAVID GOLDREICH
  • ALEXANDER LJUNGQVIST

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.

Suggested Citation

  • Francesca Cornelli & David Goldreich & Alexander Ljungqvist, 2006. "Investor Sentiment and Pre-IPO Markets," Journal of Finance, American Finance Association, vol. 61(3), pages 1187-1216, June.
  • Handle: RePEc:bla:jfinan:v:61:y:2006:i:3:p:1187-1216
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