Investor Horizon Clientele and IPO Underpricing
50 Pages Posted: 16 Sep 2009 Last revised: 3 Sep 2014
There are 2 versions of this paper
Investor Horizon Clientele and IPO Underpricing
Investor Horizon Clientele and IPO Underpricing
Date Written: October 16, 2010
Abstract
We study how the heterogeneity in investment horizons of institutional investors affects the IPO market. We document the fact that short-term investors prefer more liquid stocks than long-term investors do and that IPO stocks are very liquid in the after-market. On this premise, we argue that short-term investors should have a higher reservation price than long-term investors for IPO stocks. However, given the limited supply of short-term investors, the underwriter still prices the issue at the reservation price of long-term investors. Rationing causes the unsatisfied demand of short-term investors to express itself in the secondary market. This generates a positive relationship between short-term investor demand and both underpricing and trading at the IPO. We test this intuition by constructing a geography-based measure of “local short-term demand”, which captures the cross-sectional variations in regional investor horizon clienteles. Consistent with our hypotheses, we find that local short-term demand is strongly positively related to IPO underpricing and after-market trading volume and that the fraction of IPO holdings by short-term investors after the IPO is significantly higher than certain benchmarks. Our results are consistent with the view that investor base heterogeneity affects asset returns.
Keywords: institutional investors, investor horizon clientele, proximity investing, short-term investor fraction, IPOs, Amihud illiquidity, underpricing
JEL Classification: G24, G28
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Why Has IPO Underpricing Changed Over Time?
By Tim Loughran and Jay R. Ritter
-
Why Has IPO Underpricing Changed Over Time?
By Tim Loughran and Jay R. Ritter
-
A Review of IPO Activity, Pricing and Allocations
By Jay R. Ritter and Ivo Welch
-
A Review of IPO Activity, Pricing, and Allocations
By Ivo Welch and Jay R. Ritter
-
Why Don't Issuers Get Upset About Leaving Money on the Table in Ipos?
By Tim Loughran and Jay R. Ritter
-
Underpricing and Entrepreneurial Wealth Losses in Ipos: Theory and Evidence
-
Common Stock Offerings Across the Business Cycle: Theory and Evidence
By Hyuk Choe, Ronald W. Masulis, ...
-
IPO Market Cycles: Bubbles or Sequential Learning?
By Michelle Lowry and G. William Schwert
-
IPO Market Cycles: Bubbles or Sequential Learning?
By Michelle Lowry and G. William Schwert