Does Investor Heterogeneity Lead to IPO Overvaluation?

56 Pages Posted: 13 Feb 2008 Last revised: 19 Sep 2011

See all articles by Ming Dong

Ming Dong

York University - Schulich School of Business

Jean-Sebastien Michel

HEC Montreal

Multiple version iconThere are 3 versions of this paper

Date Written: March 15, 2008


We apply an ex ante measure of heterogeneity in investor beliefs - excess industry volatility - to test the Miller (1977) prediction about IPO overvaluation in a sample of 7,212 IPOs from 1980 to 2003. Generally, IPOs in industries with high investor heterogeneity of beliefs have much higher initial returns and lower long-run returns in the following 2-3 years than IPOs in industries with low heterogeneity. The effect of investor heterogeneity on initial returns is about four times stronger during the tech bubble period than during other periods, and the extreme bubble-period initial returns are not reversed until about 5 years after the offer, consistent with the late 1990s' market being a market bubble fueled by investor euphoria. Excess industry volatility explains half of the annual time-series variation in aggregate initial returns. These findings lend strong support to Miller's hypothesis that in markets with restricted short-selling, valuations tend to reflect the most optimistic investor's appraisal in the short-run, and revert to the average appraisal in the long-run.

Keywords: investor heterogeneity, divergence of opinion, IPOs, overvaluation, industry volatility, limited attention, category investment

JEL Classification: G11, G12, G14, G32

Suggested Citation

Dong, Ming and Michel, Jean-Sebastien, Does Investor Heterogeneity Lead to IPO Overvaluation? (March 15, 2008). Available at SSRN: or

Ming Dong (Contact Author)

York University - Schulich School of Business ( email )

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Jean-Sebastien Michel

HEC Montreal ( email )

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Montreal, Quebec H3T 2A7
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