Investor Horizon Clientele and IPO Underpricing

50 Pages Posted: 16 Sep 2009 Last revised: 3 Sep 2014

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Lei Zhang

University of Queensland - Business School

Multiple version iconThere are 2 versions of this paper

Date Written: October 16, 2010


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

Massa, Massimo and Zhang, Lei, Investor Horizon Clientele and IPO Underpricing (October 16, 2010). Available at SSRN: or

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
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+33 1 6072 4045 (Fax)

Lei Zhang (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072

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