IPOs as Lotteries: Skewness Preference and First-Day Returns
Management Science (Special Issue: Behavioral Economics and Finance), Forthcoming
28 Pages Posted: 9 Apr 2009 Last revised: 24 Jun 2011
Date Written: June 24, 2011
We find that IPOs with high expected skewness experience significantly greater first-day returns. The skewness effect is stronger during periods of high investor sentiment and is related to differences in skewness across industries as well as time-series variation in the level of skewness in the market. IPOs with high expected skewness earn more negative abnormal returns in the following one to five years. High expected skewness is also associated with a higher fraction of small-sized trades on the first day of trading, which is consistent with a greater shift in holdings from institutions to individuals. The results suggest that first-day IPO returns are related to a preference for skewness.
Keywords: Lotteries, Gambling, Skewness Preferences, IPO Underpricing
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation