Systematic Sentiment, Idiosyncratic Sentiment, and the IPO Pricing Process

53 Pages Posted: 26 Sep 2012

See all articles by Emir Hrnjic

Emir Hrnjic

National University of Singapore

Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting

Date Written: September 24, 2012

Abstract

We examine the impact of investor sentiment on the IPO pricing process. We propose that investor sentiment has a systematic component, which is due to market-wide sentiment, and an idiosyncratic (residual) component. We find some evidence that systematic sentiment impacts IPO valuations, but this relationship is not robust. We find that systematic sentiment is positively related with IPO underpricing and this relationship is more pronounced for difficult-to-arbitrage firms. Systematic sentiment is negatively related to long-run IPO returns. However, the evidence about the impact of idiosyncratic sentiment on IPO pricing process is less compelling. Overall, our findings suggest that the behavioral biases of market participants influencing IPO pricing process have a systematic market component.

Keywords: investor sentiment, behavioral finance, underwriters, going public, initial public offerings, underpricing, investment banking

JEL Classification: G24, G32

Suggested Citation

Hrnjic, Emir and Sankaraguruswamy, Srinivasan, Systematic Sentiment, Idiosyncratic Sentiment, and the IPO Pricing Process (September 24, 2012). Available at SSRN: https://ssrn.com/abstract=2151672 or http://dx.doi.org/10.2139/ssrn.2151672

Emir Hrnjic (Contact Author)

National University of Singapore ( email )

1 Business Link
Singapore, 117592
Singapore
+65 6516 7824 (Phone)

Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting ( email )

1 Business Link
Singapore, 117592
Singapore
+65 6874 4473 (Phone)
+65 6779 2083 (Fax)

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