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IPO market timing with uncertain aftermarket retail demand

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  • Santos, Francisco

Abstract

We develop a simple model of IPO timing with uncertain aftermarket retail demand. Firms prefer to go public when they expect to exploit sentiment-driven investors' overvaluations by setting offer prices above fundamental value. However, some firms have profitable investment opportunities that require immediate financing. This generates two empirical predictions: (i) the quality of the issuers' investments and (ii) their long-run performance decrease with expected retail demand. Using average IPO first-day returns as a proxy for retail demand, we find strong empirical support for the model. First, following the IPO, issuers in low-underpricing periods become more profitable and have higher investment rates than their peers. In contrast, issuers in high-underpricing periods have similar investment rates as their control firms, but become less profitable. Second, issuers in high-underpricing periods tend to underperform in the long-run, while issuers in low-underpricing periods do not.

Suggested Citation

  • Santos, Francisco, 2017. "IPO market timing with uncertain aftermarket retail demand," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 247-266.
  • Handle: RePEc:eee:corfin:v:42:y:2017:i:c:p:247-266
    DOI: 10.1016/j.jcorpfin.2016.11.013
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    References listed on IDEAS

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    Keywords

    Behavioral finance; Initial public offerings; Investor sentiment; Market timing;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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