Is A Better than B? How Affect Influences the Marketing and Pricing of Financial Securities

Abstract:     
We investigate the role of affect on asset prices through a natural experiment inherent in the designation of dual-class IPOs and its impact on IPO underpricing. We show that issuers of dual-class IPOs could and do take consumer psychology into account and manage to sell inferior securities at higher prices via branding. In the marketing of dual-class IPOs with inferior voting rights shares, Class A shares are much more frequently adopted and, at issue date, much less underpriced than Class B shares. Class A inferior voting shares enjoy higher valuation than Class B inferior voting shares for years after IPOs. Our results are statistically and economically significant and cannot be explained by a host of firm characteristics. The evidence supports the hypothesis proposed by Statman, Fisher, and Anginer (2008) that affect has a role in the pricing of financial assets. Marketing financial securities has much in common with marketing consumer products. It is the perception, or cache, that commands price premium, not necessarily actual quality.

Keywords: Dual-Class Shares, Affect, Consumer Psychology, Initial Public Offering (IPO), IPO Underpricing

JEL Classification: G14, G30, G32

Accepted Paper Series