Abstract

http://ssrn.com/abstract=282293
 
 

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Hot Markets, Investor Sentiment, and IPO Pricing


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)

Rajdeep Singh


University of Minnesota - Twin Cities - Carlson School of Management

Vikram K. Nanda


Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

November 6, 2003

AFA 2004 San Diego Meetings; Twelfth Annual Utah Winter Finance Conference; Texas Finance Festival

Abstract:     
We model an IPO company's optimal response to the presence of sentiment investors and short sale constraints. Given regulatory constraints on price discrimination, the optimal mechanism involves the issuer allocating stock to 'regular' institutional investors for subsequent resale to sentiment investors, at prices the regulars maintain by restricting supply. Because the hot market can end prematurely, carrying IPO stock in inventory is risky, so to break even in expectation regulars require the stock to be underpriced - even in the absence of asymmetric information. However, the offer price still exceeds fundamental value, as it capitalizes the regulars' expected gain from trading with the sentiment investors. This resolves the apparent paradox that issuers, while shrewdly timing their IPOs to take advantage of optimistic valuations, appear not to price their stock very aggressively. The model generates a number of new and refutable empirical predictions regarding the extent of long-run underperformance, offer size, flipping, and lock-ups.

Number of Pages in PDF File: 51

Keywords: Initial public offerings, hot issue markets, behavioural finance, long-run performance

JEL Classification: G32, G24, G14

working papers series





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Date posted: November 2, 2003  

Suggested Citation

Ljungqvist, Alexander and Singh, Rajdeep and Nanda, Vikram K., Hot Markets, Investor Sentiment, and IPO Pricing (November 6, 2003). AFA 2004 San Diego Meetings; Twelfth Annual Utah Winter Finance Conference; Texas Finance Festival. Available at SSRN: http://ssrn.com/abstract=282293 or http://dx.doi.org/10.2139/ssrn.282293

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
Rajdeep Singh
University of Minnesota - Twin Cities - Carlson School of Management ( email )
19th Avenue South
Minneapolis, MN 55455
United States
612-624-1061 (Phone)
612-626-1335 (Fax)
HOME PAGE: http://umn.edu/~rajsingh
Vikram K. Nanda
Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )
Janice H. Levin Bldg., Room 121
94 Rockafeller Road
Piscataway, NJ 08854-8054
United States
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