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Remerciements
Je tiens à remercier Mme Basilien-Gainche et Mr Dieuaide, qui en tant que directeurs de mémoire, se sont montrés à l’écoute et disponibles tout au long de ce travail. Leurs conseils avisés m’ont permis de surmonter les difficultés rencontrées lors de la réalisation de ce mémoire. En souhaitant que l’orientation donnée à mes recherches les […]
Investor Sentiment and Short Run IPO Anomaly: A Behavioral Explanation of Underpricing
Investor Sentiment and Short Run IPO Anomaly: A Behavioral Explanation of Underpricing
Auteur : Ines MAHJOUB
References
Baker, M., and J. Wurgler (2006), “Investor Sentiment and the Cross-Section of Stock Returns” Journal of Finance, Vol. LXI, No. 4, pp. 1645-1680. Baker, M., and J. Wurgler (2007), “Investor Sentiment in the Stock Market”, Journal of Economic Perspectives, Vol. 21, No. 2, pp. 129-151. Bhattacharya, U., N. Galpin, R. Ray, and X. Yu (2005), […]
CONCLUSION
The first and the most important observation in the IPO market comes back to the early writers that have been interested in IPO market, notably Stoll and Curley (1970), Logue (1973), Reilly (1973) and Ibbotson (1975), who documented that when companies go public, the price of shares they sell tends to jump substantially on the […]
III- Empirical implications and analysis:
Before presenting the results and empirical implications of the model, I should describe the different steps and the methodology I used to obtain the final specification: – 1st Step: using the AAII and II weekly sentiment indicators, I calculate three investors sentiment measures: bullish proportion (% of bullish investors / % of bullish and bearish […]
II- Data Description:
The sample consists of American Initial Public Offerings underpriced in the first day of trading for 2006 and 2007. The years 2008 and 2009 have not been included in the sample due to lack of available information. The data base includes 348 offerings, after excluding the issues having an underpricing less than 5%, the sample […]
I-2-3)Investor sentiment and Behavioral approach:
The list of proxies used by researchers to value investor sentiment and to study its impact on underpricing anomaly is very long. The most important proxies often used in researches and empirical studies are: grey market prices, market conditions, demand submitted by individual investors, discounts on closed-end funds and market-to-book ratio. Researches and empirical works […]
I-2-2)Theory asserting informational symmetry and IPO market efficiency:
I use the main characteristic of Initial Public Offerings, “risk” related to technological or valuation uncertainty and I use many measures: – The issuing firm size reflects the valuation uncertainty risk: Ln (sales), Ln (assets). – The issue risk, a dummy variable taking a value of one if the firm operates in a risky industry […]
I-2-1)Informational Asymmetry Theory:
* The theory of signalling: Firm quality The issuer is the most and best informed party about the issuing firm quality. There are many proxies of firm quality that can be employed . I introduce the most important ones often used by researchers: – The Overhang ratio = Pre-IPO shares retained by insiders/Public Float The […]
I-2)The explanatory variables:
In this paragraph, I try to justify the use of these determinants and explanatory variables in the model for each theory and to present briefly the previous results reached by researchers that used the same indicators and control variables in their models. Page suivante : I-2-1)Informational Asymmetry Theory:Retour au menu : Investor Sentiment and Short […]
I-1)The model:
As I presented in the previous sections, there are numerous explanations advanced to understand and to clarify the short run IPO anomaly. These explanations can be classified in three main categories: – Explanations based on asymmetric information between the key IPO parties and have been considered the most convincing explanations for decades. – Explanations asserting […]
I- The model and explanatory variables:
Page suivante : I-1)The model:Retour au menu : Investor Sentiment and Short Run IPO Anomaly: A Behavioral Explanation of Underpricing
Section 3- The model and empirical implications
Introduction: The effect of sentiment investors has been advocated particularly strongly for the Initial Public Offerings’ patterns, since by definition, IPO firms have no prior share price history and tend to be young, immature, and relatively informationally opaque. So they are very sensitive to the state of mind of the investors and to investors’ feelings […]
II-7)Other proxies and empirical results:
The list of proxies used by researchers to value investor sentiment and to study its impact on underpricing anomaly is very long. I presented the most important proxies in the previous paragraphs: grey market prices, market conditions, demand submitted by individual investors and discounts on closed-end funds. In the present paragraph, I try to give […]
II-6)Discount on closed-end funds as proxy for investor sentiment:
The proxies used in empirical works investigating in short run IPO anomaly to value the investor sentiment and to measure its impact on underpricing anomaly are numerous. One of the most important proxies often used by researchers is the discount on closed-end funds. The choice by many authors of the discount on closed-end funds as […]
II-5)The use of market conditions to value investor’s sentiment:
François Derrien (2003) explores the impact of investor sentiment on the pricing and aftermarket behaviour of IPOs, using a sample of 62 initial public offerings realized on the French stock exchange between 1999 and 2001. He tests a model in which the first day closing price of IPOs and then initial returns and underpricing are […]
II-4)The use of Grey Market Data:
Cornelli, Goldreich and Ljungqvist (2004) try to take advantage of the existence of a grey market in Europe to construct a model on European Initial Public Offerings to look at whether the presence of sentiment investors affects prices in the post-IPO market and whether investors’ sentiment can explain and be considered as a driver and […]
II-3)Investor sentiment by Ljungqvist, Nanda and Singh (2004):
We can say that the importance of investor sentiment was introduced and analyzed in the context of the underpricing phenomenon for the first time by Ljungqvist, Nanda and Singh (2004) in their article “Hot markets, Investor sentiment and IPO pricing”. The work of these authors is considered the first paper to model an IPO company’s […]
II-2)The prospect theory:
Prospect theory, developed by Kahneman and Tversky (1979), asserts that people focus more on changes in their wealth compared to the level of their wealth. Loughran and Ritter (2002) apply prospect theory of Kahneman and Tversky (1979) to IPO market to argue that issuers are more tolerant of excessive underpricing and that they accept underpricing […]
II-1)Informational cascades:
If potential investors pay attention not only to their own information about a new issue, but also to whether other investors are purchasing or not and they attempt to judge the interest of other investors, according to Welch (1992)(15), bandwagon effects or also known as information cascades may develop: Later investors can condition their bids […]
II- Literature review of behavioral explanations:
As I said before, the tendency of behavioral approach and investor sentiment is not a new field not again discovered, the investor sentiment was introduced earlier in the 1990’s by Welch who presented the informational cascade theory. But the Behavioral Approach has sparked the academics’ attention, has intrigued more and more researchers and has taken […]
I-3)Investors typology:
Many empirical researches examining IPO allocations focus on the distinction between types of investors: institutional investors and individual or retail investors. Institutional investors are different from retail investors, in that institutions are better informed and more important clients. The evidence to date suggests that where bookbuilding is used, institutional investors receive preferential allocations. They are […]
I-2)Hot IPO market’s phenomenon:
As we said before, by their nature the Initial Public Offerings are very sensitive to the state of mind of the investors and to the investor sentiment. Another characteristic is very important and which ensues of the first characteristic: the Initial Public Offering market is highly cyclical. The cyclical nature of this market has sparked […]
I-1)The sentiment’s notion:
The sentiment represents the anticipations of the investors that are not justified by the fundamental. The notion of sentiment characterizes the presence of irrational investors who show undue interest in an investment opportunity, for example for IPOs, and who are irrationally exuberant, over optimistic and over enthusiastic about an investment. This over optimism and over […]
I- Definitions:
The behavioral approach asserts the presence of “irrational” investors, also called “sentiment” investors or “noise traders” whose investment decisions, choices, etc, are conducted by feelings and emotions and based on sentiment which plays a major role in their decisions. Before going more in the details, it is reasonable to begin by presenting some definitions of […]
Section 2- Behavioral explanations
Introduction: Short run IPO anomaly may be the most controversial area of IPO research. The research effort has provided numerous analytical advances and empirical insights trying to explain the first day price run up. Many explanations were introduced and studied, but all these theories are unlikely to explain the persistent pattern of high initial returns […]
II-2-6)Price stabilization and partial adjustment:
Recent studies have also documented the impact of public information. They find a positive link between the “market conditions” prevailing at the time of an offering which represent public information and its subsequent initial return. Favourable market conditions predict higher underpricing and vice-versa. Derrien and Womack (2003) show that the initial returns on IPOs in […]
II-2-5)Internet Bubble:
One popular related explanation for the high and severe underpricing of 65% during the Internet bubble (1999-2000) for the U.S IPOs, a peak never reached before in the U.S IPO market, is that underwriters could not justify a higher offer price on Internet IPOs. Even if these firms have a high potential of profitability in […]
II-2-4)Underpricing as a substitute of marketing expenditures:
Habib and Ljungqvist (2001) argue that underpricing is a substitute for costly marketing expenditures. Using a data set of IPOs from 1991 to 1995, Habib and Ljungqvist report that an extra dollar left on the table reduces other marketing expenditures by a dollar. On the first sight, underpricing seems to be just a substitute for […]
II-2-3)Lawsuit avoidance: legal liability
Lawsuits are obviously costly, not only directly: damages, legal fees, diversion of management time, etc, but also in terms of the potential damage to their reputation capital. Litigation-prone investment banks may lose the confidence of their regular investors, while issuers may face a higher cost of capital in future capital issues. The basic idea of […]