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Hot Markets, Investor Sentiment, and IPO Pricing

Author

Listed:
  • Alexander Ljungqvist

    (New York University and Centre for Economic Policy Research)

  • Vikram Nanda

    (University of Michigan)

  • Rajdeep Singh

    (University of Minnesota)

Abstract

We model an IPO company's optimal response to the presence of sentiment investors. "Regular" investors are allocated stock that they subsequently sell to sentiment investors. Because sentiment demand may disappear prematurely, carrying IPO stock in inventory is risky, so for regulars to break even the stock must be underpriced. The issuer still gains as the offer price capitalizes part of the regulars' expected trading gain. This resolves the empirical puzzle that issuers do not appear to price their stock aggressively in hot markets. The model generates new refutable predictions regarding the extent of long-run underperformance, offer size, flipping, and lockups.

Suggested Citation

  • Alexander Ljungqvist & Vikram Nanda & Rajdeep Singh, 2006. "Hot Markets, Investor Sentiment, and IPO Pricing," The Journal of Business, University of Chicago Press, vol. 79(4), pages 1667-1702, July.
    • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:4:p:1667-1702
    DOI: 10.1086/503644
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    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

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