Investor Horizon Clientele and IPO Underpricing

56 Pages Posted: 17 Mar 2012

See all articles by Lei Zhang

Lei Zhang

University of Queensland - Business School

Massimo Massa

INSEAD - Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 15, 2012


We study the effect of investment horizon clienteles on the IPO market. We start from the premise – that we support with evidence – that IPO stocks are very liquid in the after-market. Therefore, short-term investors should have a higher reservation price for them than long-term investors. However, the limited potential demand of short-term investors and the firm’s incentives to have long-term investors induce the underwriter to price 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 volume 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. We show that short-term investors prefer more liquid stocks than long-term investors do and that the fraction of IPO holdings by short-term investors after the IPO is “abnormally” high. Consistent with our hypotheses, local short-term demand is strongly positively related to IPO underpricing and after-market trading volume.

Keywords: institutional investors, investor horizon clientele, proximity investing, local short-term demand, IPOs, Amihud illiquidity, underpricing

JEL Classification: G24, G28

Suggested Citation

Zhang, Lei and Massa, Massimo, Investor Horizon Clientele and IPO Underpricing (March 15, 2012). Available at SSRN: or

Lei Zhang (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

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