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How does retail sentiment affect IPO returns? Evidence from the internet bubble period

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  • Chan, Yue-Cheong

Abstract

Using small-sized buyer-initiated trades as the proxy for retail demand, we study how retail sentiment affects the returns of IPOs completed on the U.S. markets between 1994 and 2004. While we find that retail sentiment is positively related with the return volatility of IPOs on the first trading day within the whole sample period, such positive sentiment–volatility relation is the strongest during the 1999–2000 internet bubble period. Furthermore, overoptimism among sentiment investors during the bubble period results in a negative relation between retail demand and long-run post-IPO price performance. This negative relation is robust, economically significant, and can be found when the long-run post-IPO abnormal returns are adjusted by style or adjusted by industry. Overall, there is evidence that the behavior of bullish retail investors can lead to overpricing of U.S. IPO shares and price reversals in the long run.

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  • Chan, Yue-Cheong, 2014. "How does retail sentiment affect IPO returns? Evidence from the internet bubble period," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 235-248.
    • Handle: RePEc:eee:reveco:v:29:y:2014:i:c:p:235-248
    DOI: 10.1016/j.iref.2013.05.016
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    2. Li, Jinfang, 2019. "Sentiment trading, informed trading and dynamic asset pricing," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 210-222.
    3. Tsukioka, Yasutomo & Yanagi, Junya & Takada, Teruko, 2018. "Investor sentiment extracted from internet stock message boards and IPO puzzles," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 205-217.
    4. Li, Jinfang, 2014. "Multi-period sentiment asset pricing model with information," International Review of Economics & Finance, Elsevier, vol. 34(C), pages 118-130.
    5. Vincent J. Shea & Kevin E. Dow & Alain Yee-Loong Chong & Eric W. T. Ngai, 2019. "An examination of the long-term business value of investments in information technology," Information Systems Frontiers, Springer, vol. 21(1), pages 213-227, February.
    6. Yuzhuo Huang & Yosuke Shigetomi & Andrew Chapman & Ken’ichi Matsumoto, 2019. "Uncovering Household Carbon Footprint Drivers in an Aging, Shrinking Society," Energies, MDPI, vol. 12(19), pages 1-18, September.
    7. Corredor, Pilar & Ferrer, Elena & Santamaria, Rafael, 2015. "Sentiment-prone investors and volatility dynamics between spot and futures markets," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 180-196.
    8. Chen, Hung-Kun & Liang, Woan-lih, 2016. "Do venture capitalists improve the operating performance of IPOs?," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 291-304.
    9. Vincent J. Shea & Kevin E. Dow & Alain Yee-Loong Chong & Eric W. T. Ngai, 0. "An examination of the long-term business value of investments in information technology," Information Systems Frontiers, Springer, vol. 0, pages 1-15.

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    More about this item

    Keywords

    Initial public offerings; Retail sentiment; IPO long-run returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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