The Rich Get Richer and the Poor Get Poorer: Behavior of Investors in Pharmaceutical Firms Post-IPOs

Abstract

This paper analyzes stocks’ price behavior after IPO events in the pharmaceutical sector and explores the role of social media in determining this behavior. The results indicate positive and significant cumulative average abnormal returns (CAAR) of 3.70% in the first 20 days following an IPO until the end of quiet period, and a decline of tens of percent over the next three years. However, when dividing the sample into two sub-samples according to firm size, using a separation market value of $500 million, the overall picture changes dramatically. Firms with a market value lower than $500 million yielded a positive yet not significant CAAR 20 days post-IPO and a significant negative CAAR from day 50 onwards. Firms with a market value higher than $500 million experienced a significant positive CAAR from day 20 after the IPO and throughout the following year. These findings can be attributed to the limited attention of investors. Attention to the new IPOs increases until the end of quiet period and, in the case of small-sized firms, diminishes during the post-IPO years. An examination of social media and share returns demonstrates a robust correlation between the two, which may indicate that investors’ attention to these firms is also reflected in social media.

Keywords: IPO; Pharmaceutical Companies; Financial Markets; Social Media; Behavioral Finance

JEL Classification: D8, G11, G14, G17