Market Sentiment, IPO Underpricing, and Valuation

30 Pages Posted: 25 Mar 2008

See all articles by Cynthia J. Campbell

Cynthia J. Campbell

Iowa State University - Department of Accounting and Finance

S. Ghon Rhee

University of Hawaii - Shidler College of Business; University of Hawaii - Department of Financial Economics and Institutions

Yan Du

affiliation not provided to SSRN

Ning Tang

Wilfrid Laurier University

Date Written: March 2008

Abstract

We examine IPO underpricing, valuation, and wealth allocation in relation to investor sentiment, information asymmetry, and underwriter reputation. We find that underpricing is significantly higher for overvalued IPOs than for undervalued IPOs, and is positively correlated to investor sentiment. Information asymmetry is also positively correlated to the magnitude of underpricing but only for undervalued IPOs. We find no evidence of systematic over or undervaluation of IPOs based on peer firm accounting ratios. Change in market sentiment and information asymmetry is positively correlated to overvalued IPOs but not for undervalued. Better underwriter reputation leads to higher IPO valuation for all IPOs. Further, roughly 70% of the wealth from overvaluing IPOs is retained by the issuers. For overvalued IPOs with positive first day returns, we find the proportion of total overvaluation that occurs in the after market trading, i.e., wealth allocated to IPO subscribers, is negatively correlated to underwriter reputation. We conclude underwriters selectively overvalue some IPOs after observing investor sentiment and take advantage of their information to maximize the benefit for issuers and indirectly themselves.

Keywords: IPO, underpricing, valuation, sentiment, underwriter reputation, information asymmetry

JEL Classification: G12, G24

Suggested Citation

Campbell, Cynthia J. and Rhee, S. Ghon and Du, Yan and Tang, Ning, Market Sentiment, IPO Underpricing, and Valuation (March 2008). Available at SSRN: https://ssrn.com/abstract=1108540 or http://dx.doi.org/10.2139/ssrn.1108540

Cynthia J. Campbell

Iowa State University - Department of Accounting and Finance ( email )

Carver Hall
Ames, IA 50011-2063
United States
515-294-8104 (Phone)
515-294-3525 (Fax)

S. Ghon Rhee

University of Hawaii - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii - Department of Financial Economics and Institutions ( email )

United States

Yan Du

affiliation not provided to SSRN

Ning Tang (Contact Author)

Wilfrid Laurier University ( email )

75 University Ave W
Waterloo, Ontario N2L 3C5
Canada

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