The Impact of Media Exposure and Market Psychology on the Underpricing of Initial Public Offerings: The UK Case
20 Pages Posted: 16 Dec 2003
Date Written: February 12, 2003
The paper examines the relationship between the UK companies' first day returns from IPOs (Initial Public Offerings) that took place on London Stock Exchange during the period January 1997 - May 2002 and the media exposure they received prior to their listing. Also, it takes into consideration the underpricing trend of recent offerings, the effect of the technological crash of 2000 and the issue and firm size. Our preliminary results indicate that there is a systematic relationship between the variables capturing the market sentiment surrounding an IPO and its first day returns. Contrary to previous surveys regarding the psychology of the market we found a negative correlation between underpricing and media exposure. Also, the underpricing of an IPO candidate follows its recent IPOs' level of underpricing only before the tech-crash and the mean level of first day returns are significantly higher for the period prior to tech-crash. Finally, our results comply with the past empirical evidence where, on average, big companies offer lower first day returns and small companies raise relatively more money when going public.
Keywords: Initial public ofering, underpricing, market psychology, LSE
JEL Classification: G12, G14
Suggested Citation: Suggested Citation