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

Year 2022, Volume: 11 Issue: 1, 1 - 14, 30.03.2022
https://doi.org/10.17261/Pressacademia.2022.1548

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.

References

  • Akerlof, G. A. (1970). The market for “lemons”: Qualitative uncertainty and the market mechanism. The Quarterly Journal of Economics, 84(3), 488–500.
  • Bajo, E., & Raimondo, C. (2017). Media sentiment and IPO underpricing. Journal of Corporate Finance, 46, 139-153.
  • Baker, M., & Wurgler, J. (2006). Investor sentiment and the cross‐section of stock returns. The journal of Finance, 61(4), 1645-1680.
  • Barber, B. M., & Lyon, J. D. (1997). Detecting long-run abnormal stock returns: The empirical power and specification of test statistics. Journal of Financial Economics, 43(3), 341-372.
  • Barry, C. B., Muscarella, C. J., Peavy Iii, J. W., & Vetsuypens, M. R. (1990). The role of venture capital in the creation of public companies: Evidence from the going-public process. Journal of Financial economics, 27(2), 447-471.
  • Beck, J. (2017). Determinants of IPO underpricing: Tech vs non-tech industries. Major Themes in Economics, 19(1), 39-55.
  • Brown, G. W., & Cliff, M. T. (2004). Investor sentiment and the near-term stock market. Journal of Empirical Finance, 11(1), 1-27.
  • Chambers, D., & Dimson, E. (2009). IPO underpricing over the very long run. Journal of Finance, 64(3), 1407-1443.
  • Cornelli, F., Goldreich, D., & Ljungqvist, A. (2006). Investor sentiment and pre‐IPO markets. Journal of Finance, 61(3), 1187-1216.
  • Cox, J. C., & Isaac, R. M. (1984). In search of the winner's curse. Economic Inquiry, 22(4), 579-592.
  • Derrien, F. (2005). IPO pricing in “hot” market conditions: who leaves money on the table? Journal of Finance, 60(1), 487-521.
  • Fisher, K. L., & Statman, M. (2000). Investor sentiment and stock returns. Financial Analysts Journal, 56(2), 16-23.
  • Gompers, P., & Lerner, J. (1996). The use of covenants: An empirical analysis of venture partnership agreements. Journal of Law and Economics, 39(2), 463-498.
  • Gregori, G. L., Marinelli, L., Mazzoli, C., & Severini, S. (2020). The social side of IPOs: Twitter sentiment and investors’ attention in the IPO primary market. African Journal of Business Management, 14(12), 529-539.
  • Hens, T, & Benli, V. F. (2021). Behavioral finance in the era of Covid-19. PressAcademia Procedia, 14(1), 106-107.
  • Hens, T., & Bachmann, K. (2011). Behavioural finance for private banking, V. 534, John Wiley & Sons.
  • Hens, T., & Schenk-Hoppé, K. R. (Eds.). (2009). Handbook of financial markets: dynamics and evolution. Elsevier.
  • Hoechle, D., Karthaus, L., & Schmid, M. (2021). The Long-Term Performance of IPOs Revisited. Available at SSRN: https://ssrn.com/abstract=2929733.
  • Ibbotson, R. G. (1975). Price performance of common stock new issues. Journal of Financial Economics, 2(3), 235-272.
  • Khin, E. W. S., Ricky Wong, W. B., & Ting, L. S. (2017). Initial public offering (IPO) underpricing in Malaysian settings. Journal of Economic and Financial Studies (JEFS), 5(2), 14-25.
  • Kim, W. & Weisbach, M. S. (2005). Do firms go public to raise capital? NBER Working Paper Series. http://www.nber.org/papers/w11197.
  • Kiymaz, H. (2000). The initial and aftermarket performance of IPOs in an emerging market: evidence from Istanbul Stock Exchange. Journal of Multinational Financial Management, 10(2), 213-227.
  • Kooli, M., & Suret, J. M. (2004). The aftermarket performance of initial public offerings in Canada. Journal of Multinational Financial Management, 14(1), 47-66.
  • Lahti, N. (2021). IPO Underpricing and Long-term Performance in the US Stock Market. Master’s thesis. Aalto University, Finland, Espoo
  • Lee, P. M., & Wahal, S. (2004). Grandstanding, certification and the underpricing of venture capital backed IPOs. Journal of Financial Economics, 73(2), 375-407.
  • Liu, L., Zhang, Z., & Lyu, K. (2021, September). A Study of IPO Underpricing Using Regression Model Based on Information Asymmetry, Media, and Institution. In 2021 International Conference on Financial Management and Economic Transition (FMET 2021) (pp. 322-333). Atlantis Press.
  • Ljungqvist, A. (2007). IPO underpricing. Handbook of Empirical Corporate Finance, 375-422.
  • Loughran, T., & Ritter, J. (2004). Why Has IPO Underpricing Changed over Time? Financial Management, 33(3), 5–37. https://www.jstor.org/stable/3666262
  • Lowry, M. (2003). Why does IPO volume fluctuate so much? Journal of Financial Economics, 67(1), 3-40.
  • Lyon, J. D., Barber, B. M., & Tsai, C. L. (1999). Improved methods for tests of long‐run abnormal stock returns. Journal of Finance, 54(1), 165- 201.
  • Michaely, R., & Shaw, W. H. (1994). The pricing of initial public offerings: Tests of adverse-selection and signaling theories. The Review of Financial Studies, 7(2), 279-319.
  • Montier, J., & Strategy, G. E. (2002). Applied behavioural finance: Insights into irrational minds and market. West Sussex, England: John Wiley & Sons.
  • Pagano, M., Panetta, F., & Zingales, L. (1998). Why do companies go public? An empirical analysis. Journal of Finance, 53(1), 27-64.
  • Rahman, J. M., & Yang, M. (2021). Effects of venture capital, R&D, and technology on IPO Underpricing: evidence from China. Capital Markets Review. Available at SSRN: https://ssrn.com/abstract=3933168
  • Rathnayake, D. N., Louembé, P. A., Kassi, D. F., Sun, G., & Ning, D. (2019). Are IPOs underpriced or overpriced? Evidence from an emerging market. Research in International Business and Finance, 50, 171-190.
  • Ritter, J. R. (1991). The long‐run performance of initial public offerings. Journal of Finance, 46(1), 3-27.
  • Ritter, J. R., & Welch, I. (2002). A review of IPO activity, pricing, and allocations. Journal of Finance, 57(4), 1795-1828.
  • Rock, K. (1986). Why new issues are underpriced. Journal of Financial Economics, 15(1-2), 187-212.
  • Szyszka, A. (2013). Behavioral finance and capital markets: How psychology influences investors and corporations. New York, NY: Palgrave Macmillan.
  • Thomadakis, S., Nounis, C., & Gounopoulos, D. (2012). Long‐term performance of Greek IPOs. European Financial Management, 18(1), 117- 141.
  • Tran, T. H. L., Le, D. C., & Hoang, T. P. T. (2015). The underpricing and long-run underperformance of initial public offerings: evidence from Vietnam. International Journal of Business and Emerging Markets, 7(1), 3-24.
  • Wang, M., Rieger, M. O., & Hens, T. (2017). The impact of culture on loss aversion. Journal of Behavioral Decision Making, 30(2), 270-281.
  • Xian, Y. (2021). Social Media Sentiment and IPO Pricing. Available at SSRN: https://ssrn.com/abstract=3870563.
  • Zhang, C. (2008). Defining, modeling, and measuring investor sentiment. Doctoral Dissertation. University of California, Berkeley
Year 2022, Volume: 11 Issue: 1, 1 - 14, 30.03.2022
https://doi.org/10.17261/Pressacademia.2022.1548

Abstract

References

  • Akerlof, G. A. (1970). The market for “lemons”: Qualitative uncertainty and the market mechanism. The Quarterly Journal of Economics, 84(3), 488–500.
  • Bajo, E., & Raimondo, C. (2017). Media sentiment and IPO underpricing. Journal of Corporate Finance, 46, 139-153.
  • Baker, M., & Wurgler, J. (2006). Investor sentiment and the cross‐section of stock returns. The journal of Finance, 61(4), 1645-1680.
  • Barber, B. M., & Lyon, J. D. (1997). Detecting long-run abnormal stock returns: The empirical power and specification of test statistics. Journal of Financial Economics, 43(3), 341-372.
  • Barry, C. B., Muscarella, C. J., Peavy Iii, J. W., & Vetsuypens, M. R. (1990). The role of venture capital in the creation of public companies: Evidence from the going-public process. Journal of Financial economics, 27(2), 447-471.
  • Beck, J. (2017). Determinants of IPO underpricing: Tech vs non-tech industries. Major Themes in Economics, 19(1), 39-55.
  • Brown, G. W., & Cliff, M. T. (2004). Investor sentiment and the near-term stock market. Journal of Empirical Finance, 11(1), 1-27.
  • Chambers, D., & Dimson, E. (2009). IPO underpricing over the very long run. Journal of Finance, 64(3), 1407-1443.
  • Cornelli, F., Goldreich, D., & Ljungqvist, A. (2006). Investor sentiment and pre‐IPO markets. Journal of Finance, 61(3), 1187-1216.
  • Cox, J. C., & Isaac, R. M. (1984). In search of the winner's curse. Economic Inquiry, 22(4), 579-592.
  • Derrien, F. (2005). IPO pricing in “hot” market conditions: who leaves money on the table? Journal of Finance, 60(1), 487-521.
  • Fisher, K. L., & Statman, M. (2000). Investor sentiment and stock returns. Financial Analysts Journal, 56(2), 16-23.
  • Gompers, P., & Lerner, J. (1996). The use of covenants: An empirical analysis of venture partnership agreements. Journal of Law and Economics, 39(2), 463-498.
  • Gregori, G. L., Marinelli, L., Mazzoli, C., & Severini, S. (2020). The social side of IPOs: Twitter sentiment and investors’ attention in the IPO primary market. African Journal of Business Management, 14(12), 529-539.
  • Hens, T, & Benli, V. F. (2021). Behavioral finance in the era of Covid-19. PressAcademia Procedia, 14(1), 106-107.
  • Hens, T., & Bachmann, K. (2011). Behavioural finance for private banking, V. 534, John Wiley & Sons.
  • Hens, T., & Schenk-Hoppé, K. R. (Eds.). (2009). Handbook of financial markets: dynamics and evolution. Elsevier.
  • Hoechle, D., Karthaus, L., & Schmid, M. (2021). The Long-Term Performance of IPOs Revisited. Available at SSRN: https://ssrn.com/abstract=2929733.
  • Ibbotson, R. G. (1975). Price performance of common stock new issues. Journal of Financial Economics, 2(3), 235-272.
  • Khin, E. W. S., Ricky Wong, W. B., & Ting, L. S. (2017). Initial public offering (IPO) underpricing in Malaysian settings. Journal of Economic and Financial Studies (JEFS), 5(2), 14-25.
  • Kim, W. & Weisbach, M. S. (2005). Do firms go public to raise capital? NBER Working Paper Series. http://www.nber.org/papers/w11197.
  • Kiymaz, H. (2000). The initial and aftermarket performance of IPOs in an emerging market: evidence from Istanbul Stock Exchange. Journal of Multinational Financial Management, 10(2), 213-227.
  • Kooli, M., & Suret, J. M. (2004). The aftermarket performance of initial public offerings in Canada. Journal of Multinational Financial Management, 14(1), 47-66.
  • Lahti, N. (2021). IPO Underpricing and Long-term Performance in the US Stock Market. Master’s thesis. Aalto University, Finland, Espoo
  • Lee, P. M., & Wahal, S. (2004). Grandstanding, certification and the underpricing of venture capital backed IPOs. Journal of Financial Economics, 73(2), 375-407.
  • Liu, L., Zhang, Z., & Lyu, K. (2021, September). A Study of IPO Underpricing Using Regression Model Based on Information Asymmetry, Media, and Institution. In 2021 International Conference on Financial Management and Economic Transition (FMET 2021) (pp. 322-333). Atlantis Press.
  • Ljungqvist, A. (2007). IPO underpricing. Handbook of Empirical Corporate Finance, 375-422.
  • Loughran, T., & Ritter, J. (2004). Why Has IPO Underpricing Changed over Time? Financial Management, 33(3), 5–37. https://www.jstor.org/stable/3666262
  • Lowry, M. (2003). Why does IPO volume fluctuate so much? Journal of Financial Economics, 67(1), 3-40.
  • Lyon, J. D., Barber, B. M., & Tsai, C. L. (1999). Improved methods for tests of long‐run abnormal stock returns. Journal of Finance, 54(1), 165- 201.
  • Michaely, R., & Shaw, W. H. (1994). The pricing of initial public offerings: Tests of adverse-selection and signaling theories. The Review of Financial Studies, 7(2), 279-319.
  • Montier, J., & Strategy, G. E. (2002). Applied behavioural finance: Insights into irrational minds and market. West Sussex, England: John Wiley & Sons.
  • Pagano, M., Panetta, F., & Zingales, L. (1998). Why do companies go public? An empirical analysis. Journal of Finance, 53(1), 27-64.
  • Rahman, J. M., & Yang, M. (2021). Effects of venture capital, R&D, and technology on IPO Underpricing: evidence from China. Capital Markets Review. Available at SSRN: https://ssrn.com/abstract=3933168
  • Rathnayake, D. N., Louembé, P. A., Kassi, D. F., Sun, G., & Ning, D. (2019). Are IPOs underpriced or overpriced? Evidence from an emerging market. Research in International Business and Finance, 50, 171-190.
  • Ritter, J. R. (1991). The long‐run performance of initial public offerings. Journal of Finance, 46(1), 3-27.
  • Ritter, J. R., & Welch, I. (2002). A review of IPO activity, pricing, and allocations. Journal of Finance, 57(4), 1795-1828.
  • Rock, K. (1986). Why new issues are underpriced. Journal of Financial Economics, 15(1-2), 187-212.
  • Szyszka, A. (2013). Behavioral finance and capital markets: How psychology influences investors and corporations. New York, NY: Palgrave Macmillan.
  • Thomadakis, S., Nounis, C., & Gounopoulos, D. (2012). Long‐term performance of Greek IPOs. European Financial Management, 18(1), 117- 141.
  • Tran, T. H. L., Le, D. C., & Hoang, T. P. T. (2015). The underpricing and long-run underperformance of initial public offerings: evidence from Vietnam. International Journal of Business and Emerging Markets, 7(1), 3-24.
  • Wang, M., Rieger, M. O., & Hens, T. (2017). The impact of culture on loss aversion. Journal of Behavioral Decision Making, 30(2), 270-281.
  • Xian, Y. (2021). Social Media Sentiment and IPO Pricing. Available at SSRN: https://ssrn.com/abstract=3870563.
  • Zhang, C. (2008). Defining, modeling, and measuring investor sentiment. Doctoral Dissertation. University of California, Berkeley
There are 44 citations in total.

Details

Primary Language English
Subjects Finance, Business Administration
Journal Section Articles
Authors

Fatouma Ahmed Ibrahım This is me 0000-0002-6380-8539

Vahit Ferhan Benlı This is me 0000-0002-0510-7662

Publication Date March 30, 2022
Published in Issue Year 2022 Volume: 11 Issue: 1

Cite

APA Ibrahım, F. A., & Benlı, V. F. (2022). IMPACT OF INVESTORS SENTIMENT ON IPO PERFORMANCE: EVIDENCE FROM NASDAQ AND NYSE. Journal of Business Economics and Finance, 11(1), 1-14. https://doi.org/10.17261/Pressacademia.2022.1548

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