Abstract

http://ssrn.com/abstract=1294441
 
 

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Does Prospect Theory Explain IPO Market Behavior?


Alexander Ljungqvist


New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

William J. Wilhelm


University of Virginia - McIntire School of Commerce

February 2004

NYU Working Paper No. FIN-04-006

Abstract:     
We derive a behavioral measure of the IPO decision-maker s satisfaction with the underwriter s performance based on Loughran and Ritter s (2002) application of prospect theory to IPO underpricing. We assess the plausibility of this measure by studying its power to explain the decision-maker s subsequent choices. Controlling for other known factors, IPO firms are less likely to switch underwriters for their first seasoned equity offering when our behavioral measureindicates they were satisfied with the IPO underwriter s performance. Underwriters also appear to benefit from behavioral biases in the sense that they extract higher fees for subsequent transactions involving satisfied decision-makers. Although our tests suggest there is explanatory power in the behavioral model, they do not speak directly to whether deviations from expected utility maximization determine patterns in IPO initial returns.

Number of Pages in PDF File: 40

Keywords: Prospect theory, Behavioral finance, Initial public offerings, Underpricing

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Date posted: November 3, 2008  

Suggested Citation

Ljungqvist, Alexander and Wilhelm, William J., Does Prospect Theory Explain IPO Market Behavior? (February 2004). NYU Working Paper No. FIN-04-006. Available at SSRN: http://ssrn.com/abstract=1294441

Contact Information

Alexander Ljungqvist (Contact Author)
New York University (NYU) - Department of Finance ( email )
Stern School of Business
44 West 4th Street, Suite 9-160
New York, NY 10012-1126
United States
212-998-0304 (Phone)
212-995-4220 (Fax)
HOME PAGE: http://pages.stern.nyu.edu/~aljungqv
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Research Institute of Industrial Economics (IFN) ( email )
Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden
William J. Wilhelm
University of Virginia (UVA) - McIntire School of Commerce ( email )
Rouss & Robertson Halls, East Lawn
P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-924-7666 (Phone)
434-924-7074 (Fax)
HOME PAGE: http://gates.comm.virginia.edu/wjw9a/
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