Sentiment Traders & IPO Initial Returns

54 Pages Posted: 20 Mar 2011

See all articles by Arif Khurshed

Arif Khurshed

University of Manchester - Manchester Business School, Division of Accounting Finance

Alok Pande

Government of India; Indian Institute of Management (IIMB), Bangalore

Ajai K. Singh

Department of Finance, University of Central Florida

Date Written: March 15, 2011

Abstract

The distinct regulatory design of Indian IPOs permits an empirical evaluation of IPO underpricing models against those that model IPO initial returns as a consequence of overpricing. Characteristics of the Indian bookbuilding process allow us to study the timing and subscription patterns of different investor groups and to dissect IPO returns into two distinct components: one relating to pre-listing pricing by the underwriter and the other to the initial return from first day’s trade in the post-listing period. We find that a transparent bookbuilding process can alleviate the winner’s curse problem for retail investors but that does not eliminate IPO initial returns. Further, IPO initial returns persist but do not increase even if investment bankers are stripped of their discretionary allocation power. These results are not supportive of voluntary underpricing models. We find that the unmet demand of non-institutional investor groups is the primary driver of the IPO initial return. We consider these results to be supportive of the Derrien (2005) and Ljungqvist, Nanda and Singh (2006) models and consistent with the conclusions in Loffler, Panther and Theissen (2005) and Ljungqvist, Cornelli and Goldreich (2006).

Keywords: IPOs, bookbuilding, underpricing, winner’s curse, sentiment traders

JEL Classification: G11, G15, G18

Suggested Citation

Khurshed, Arif and Pande, Alok and Singh, Ajai K., Sentiment Traders & IPO Initial Returns (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1786834 or http://dx.doi.org/10.2139/ssrn.1786834

Arif Khurshed (Contact Author)

University of Manchester - Manchester Business School, Division of Accounting Finance ( email )

Crawford House
Oxford Road
Manchester, M15 6PB
United Kingdom
+44 0 161 275 4475 (Phone)
+44 0 161 275 4023 (Fax)

Alok Pande

Government of India ( email )

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Ajai K. Singh

Department of Finance, University of Central Florida ( email )

College of Business Administration
12744 Pegasus Drive
Orlando, FL 32816
United States
407-823-0761 (Phone)
407-823-6676 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
158
Abstract Views
1,186
rank
211,116
PlumX Metrics