IPO Issuers’ Reservation Price and Market Over-Optimism

38 Pages Posted: 9 Jan 2018

See all articles by Tianze Li

Tianze Li

University of Manitoba - Department of Accounting and Finance

Steven Xiaofan Zheng

University of Manitoba - Asper School of Business

Date Written: February 5, 2016

Abstract

Assuming that initial public offering (IPO) issuers can value their own firms more accurately, we test the hypothesis that the stock markets tend to overvalue IPOs. Using the lower limit of initial filing price range as issuers’ reservation price, we estimate the premiums of IPO first day closing price and first month closing price over the reservation price using 3,138 initial public offerings (IPOs) from 1983 to 2012. We find that the price premiums are positively related to proxies for market over-optimism and uncertainty. IPOs with higher price premiums have worse stock performance in the long run. The results are robust to various economic specifications. The findings are consistent with the argument that the stock markets get over- optimistic about IPOs from time to time.

Keywords: IPO, price premiums, over-optimism, long-run performance

JEL Classification: G14, G30, G32

Suggested Citation

Li, Tianze and Zheng, Steven Xiaofan, IPO Issuers’ Reservation Price and Market Over-Optimism (February 5, 2016). Available at SSRN: https://ssrn.com/abstract=3097136 or http://dx.doi.org/10.2139/ssrn.3097136

Tianze Li

University of Manitoba - Department of Accounting and Finance ( email )

Faculty of Management
Winnipeg, MB R3T 5V4
Canada

Steven Xiaofan Zheng (Contact Author)

University of Manitoba - Asper School of Business ( email )

Department of Accounting and Finance
Winnipeg, Manitoba R3T 5V4
Canada
204-474-7933 (Phone)

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