IPO Pricing in 'Hot' Market Conditions: Who Leaves Money on the Table?

Posted: 25 Aug 2006

Abstract

This paper explores the impact of investor sentiment on the pricing and aftermarket behavior of IPOs. Using a model in which the aftermarket price of IPO shares depends on the information about the intrinsic value of the company and investor sentiment, I show that IPOs can be overpriced, and still exhibit positive initial return.

The predictions of the model are supported by a sample of recent French offerings, in which a fraction of the shares was reserved for individual investors. Individual investors' demand is positively related to market conditions. Moreover, large individual investors' demand leads to high IPO prices, large initial returns, and poor long-run performance.

Suggested Citation

Derrien, François, IPO Pricing in 'Hot' Market Conditions: Who Leaves Money on the Table?. Journal of Finance, Vol. 60, No. 1, pp 487-521, 2005, Available at SSRN: https://ssrn.com/abstract=687132

François Derrien (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
33 1 39 67 72 98 (Phone)

HOME PAGE: http://www.hec.fr/derrien

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