Investor Sentiment and Pre-Ipo Markets

36 Pages Posted: 3 Aug 2005

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)

Francesca Cornelli

London Business School; Centre for Economic Policy Research (CEPR)

David Goldreich

University of Toronto - Rotman School of Management

Date Written: February 11, 2005

Abstract

We examine whether irrational behavior among small (retail) investors drives post-IPO prices. We use prices from the grey market (the when-issued market that precedes European IPOs) to proxy for small investors' valuations. High grey market prices (indicating excessive optimism) are a very good predictor of first-day aftermarket prices, while low grey market prices (indicating excessive pessimism) are not. Moreover, we find long-run price reversal only following high grey market prices. Thus, small investors sometimes drive post-IPO prices temporarily upwards, but never downwards. This asymmetric pattern obtains because the larger (institutional) investors who are allocated IPO shares sell them to small investors in the aftermarket when the small investors are overoptimistic, but ignoring them when they are excessively pessimistic.

Keywords: Investor sentiment, IPOs, grey markets

JEL Classification: G3, G24

Suggested Citation

Ljungqvist, Alexander and Cornelli, Francesca and Goldreich, David, Investor Sentiment and Pre-Ipo Markets (February 11, 2005). AFA 2005 Philadelphia Meetings, EFA 2005 Moscow Meetings Paper, Available at SSRN: https://ssrn.com/abstract=548683 or http://dx.doi.org/10.2139/ssrn.548683

Alexander Ljungqvist

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 the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

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

Francesca Cornelli (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 20 7262 5050 x3225 (Phone)
+44 20 7724 3317 (Fax)

HOME PAGE: http://www.lbs.ac.uk/faculty/fcornelli/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

David Goldreich

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-0833 (Phone)

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