Are Investors Rational When Valuing Loss Firms?

Forthcoming in Journal of Behavioral Finance

31 Pages Posted: 14 Nov 2016 Last revised: 20 Nov 2016

See all articles by Cécile Carpentier

Cécile Carpentier

Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Lille II - European Center for Corporate Control Studies

Frédéric Romon

University of Lille - Skema Business School

Jean-Marc Suret

Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); European Center for Corporate Control Studies

Date Written: September 29, 2016

Abstract

This paper examines whether high valuation of loss firms really exists and can be explained by behavioral factors. This valuation may originate from irrational behavior of optimistic investors who prefer lottery-like stocks, or from rational expectations of firms’ profitability. Using a sample of small Canadian firms going public, we show that both individual investors and underwriters price loss firms higher than profit firms, everything being equal. Post-IPO three-year underperformance does not differ statistically between loss and profit firms. Investors thus apparently behave irrationally for all firms, but their irrationality does not seem greater for loss firms.

Keywords: valuation, loss firms, irrational behavior, IPO, lottery stock

Suggested Citation

Carpentier, Cécile and Romon, Frédéric and Suret, Jean-Marc, Are Investors Rational When Valuing Loss Firms? (September 29, 2016). Forthcoming in Journal of Behavioral Finance. Available at SSRN: https://ssrn.com/abstract=2867607 or http://dx.doi.org/10.2139/ssrn.2867607

Cécile Carpentier (Contact Author)

Laval University ( email )

Pavilion Palasis Prince
Quebec, Quebec G1V 0A6
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th floor
Montreal, Quebec H3C 3J7
Canada

University of Lille II - European Center for Corporate Control Studies ( email )

2 rue de Mulhouse
BP381
Lille, 59800
France

Frédéric Romon

University of Lille - Skema Business School

Jean-Marc Suret

Laval University ( email )

Accounting School
Quebec, P.Q. G1K 7P4
Canada
418-656-7134 (Phone)
418-656-7746 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

1130 rue Sherbrooke Ouest
Bureau 1400
Montreal, Quebec H3A 2M8
Canada

European Center for Corporate Control Studies ( email )

2 rue de Mulhouse
BP381
Lille, 59800
France

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