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Investor Sentiment and Pre-IPO Markets
Francesca Cornelli London Business School; Centre for Economic Policy Research (CEPR) Alexander Ljungqvist New York University - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI) David Goldreich Rotman School of Management - University of Toronto; Centre for Economic Policy Research (CEPR) February 11, 2005 AFA 2005 Philadelphia Meetings EFA 2005 Moscow Meetings Paper Abstract: We examine whether irrational behavior among small (retail) investors drives post-IPO prices. We use prices from the grey market (the when-issued market that precedes European IPOs) to proxy for small investors' valuations. High grey market prices (indicating excessive optimism) are a very good predictor of first-day aftermarket prices, while low grey market prices (indicating excessive pessimism) are not. Moreover, we find long-run price reversal only following high grey market prices. Thus, small investors sometimes drive post-IPO prices temporarily upwards, but never downwards. This asymmetric pattern obtains because the larger (institutional) investors who are allocated IPO shares sell them to small investors in the aftermarket when the small investors are overoptimistic, but ignoring them when they are excessively pessimistic.
Keywords: Investor sentiment, IPOs, grey markets JEL Classifications: G3, G24 Working Paper SeriesDate posted: August 03, 2005 ; Last revised: August 03, 2005Suggested CitationContact Information
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