IMPACT OF INVESTORS SENTIMENT ON IPO PERFORMANCE: EVIDENCE FROM NASDAQ AND NYSE

Abstract

Purpose- The paper explores the correlation between investors’ sentiment, underpricing and performance over a period of 36 months of newly issued American stocks with a sample of 199 newly listed firms on NASDAQ and NYSE within the period of January 2015 to April 2021. IPOs listed on US stock exchanges have received little attention even though anomalies related to new stock issues are well documented. We aim to fill the existing academic gap. Methodology- We have hypothesized investor sentiment as the potential explaining variable inducing the anomalies observed and we extract this variable from the American Association of Individual Investors1 survey results per the nearest date of each IPO issue. We compute the returns in two separate timeframes. The Market Adjusted Initial Returns (MAIRs) are computed as the price change observed during the offer day, adjusted to the S&P500 index. We investigate long-term performance by calculating the Buy-and-Hold Abnormal Return (BHARs) of each IPO for a period of 36months. The company characteristics, which are age, proceeds, number of issued shares, venture capital backing status and economic sector, are retrieved from Thomson Reuter’s screens to control on IPO pricing. Then we use a regression model to see whether the predictor variable has an effect on the outcome variable. Findings- We found that the correlation between the bullish ratio and the MAIRs confirms results found in previous literature and no relationship between investor sentiment and long run performance have been observed. Conclusion- We conclude that on American stock markets, the existing underpricing can be explained by investors overreacting to new issues while findings relative to the long run performance contradict earlier research, as there is no evidence of underperformance among companies that went public between January 2015 and April 2021. Further research can be oriented toward understand why the documented poor performance related to IPOs no longer exists, as well as the particular characteristics of US markets which are favorable to the profitability of the new issues in the long-term.

Keywords

• Investor sentiment
• behavioral finance
• long-term performance
• underpricing
• initial public offering
• IPO

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