Hot Markets, Investor Sentiment and IPO Pricing

47 Pages Posted: 29 Nov 2001

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Rajdeep Singh

University of Minnesota - Twin Cities - Carlson School of Management

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Multiple version iconThere are 3 versions of this paper

Date Written: November 2001

Abstract

Our model of the initial public offering process links the three main empirical IPO 'anomalies' - underpricing, hot issue markets, and long-run underperformance - and traces them to a common source of inefficiency. We relate hot IPO markets (such as the 1999/2000 market for Internet IPOs) to the presence of a class of investors who are 'irrational' in the sense of having exuberant expectations regarding future performance. Underpricing and long-run underperformance emerge as underwriters attempt to maximize profits from the sale of equity, at the expense of these exuberant investors. Underpricing serves to compensate regular IPO investors for their role in restricting the supply of available shares and maintaining prices. The model is shown to be consistent with many aspects of the IPO process. It also generates a number of new empirical predictions.

Keywords: Initial public offerings, hot issue markets, behavioural finance, long-run performance

JEL Classification: G24, G34

Suggested Citation

Ljungqvist, Alexander and Singh, Rajdeep and Nanda, Vikram K., Hot Markets, Investor Sentiment and IPO Pricing (November 2001). CEPR Discussion Paper No. 3053. Available at SSRN: https://ssrn.com/abstract=291881

Alexander Ljungqvist (Contact Author)

Stockholm School of Economics ( email )

111 60 Stockholm
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Rajdeep Singh

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1061 (Phone)
612-626-1335 (Fax)

HOME PAGE: http://umn.edu/~rajsingh

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

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