Recherche
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-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 […]
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 […]
I- The model and explanatory variables:
Retour au menu : Investor Sentiment and Short Run IPO Anomaly: A Behavioral Explanation of Underpricing
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-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. Retour au menu : Investor Sentiment and Short Run IPO Anomaly: A Behavioral […]
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-2-2\\ 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-2-3 \\ 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 […]
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 […]
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 […]
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 […]
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), […]
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
INTRODUCTION
Going public constitutes a real driver for the development of a company, enabling it to increase its equity capital and to overcome the constraint that its founders are no longer able to provide the capital needed for its expansion, and enabling it to diversify its sources of financing without the need for debt. It is […]
Section 1- Short run IPO anomaly and traditional explanations
Introduction: The underpricing is a short run anomaly characterizing the IPO market. This phenomenon has inspired a large theoretical literature over decades trying to give a relevant and a convincing explanation to this first day phenomenon. Underpricing anomaly has intrigued academics and practitioners over the past three decades and has generated considerable research aimed at […]
I- Underpricing anomaly: a persistent phenomenon that characterizes IPO market
Retour au menu : Investor Sentiment and Short Run IPO Anomaly: A Behavioral Explanation of Underpricing
I-1\\ Underpricing definition:
Before going in details, presenting the explanations advanced for the short run IPO anomaly, it is logical to begin by a definition of this notion of “underpricing” to understand this short run phenomenon: Early writers that have been interested in IPO market, notably Stoll and Curley (1970), Logue (1973), Reilly (1973) and Ibbotson (1975), are […]
I-2\\ A persistent anomaly in time:
In the United States, at the end of the first day of trading, the shares traded on average at 18.9% above the offer price at which the company sold them (1990-2007). Underpricing has averaged 21.2% in the 1960s, 9% in the 1970s, and increasing from 7.8% in the 1980s to 14.4% in the 1990s and […]
I-3\\ A persistent anomaly in all countries:
Many researchers have been concentrated in studying the persistence of underpricing anomaly internationally. The underpricing phenomenon of Initial Public Offerings (IPOs) has been widely studied across different stock markets around the world and it is a persistent phenomenon all over the world. Loughran, Ritter and Rydqvist (1994)(2) documented that the underpricing anomaly exists in all […]
I-4\\ A persistent anomaly in all industries:
Underpricing is also persistent for all the industries: automobile, banks, chemicals, construction, financial services, food and beverages, industrial, machinery, media, pharmaceutical and health, software, technology, telecommunications, transport and logistics … Every firm, which decides to go public, faces the phenomenon of underpricing, the price of shares the firm sells tends to jump substantially on the […]
II- Theoretical explanations of short run underpricing: A literature review
The research effort aimed at explaining the short run anomaly of the IPO market has provided numerous analytical advances and empirical insights, and a large list of explanations has been offered. Ibbotson (1975) is the first who offered a list of possible explanations for underpricing, many of which were formally explored by other authors in […]
II-1\\ Asymmetric information:
The key parties to an IPO transaction are the issuing firm, the bank underwriting and marketing the deal, and investors. Asymmetric information models assume that one of these parties knows more than the others. Retour au menu : Investor Sentiment and Short Run IPO Anomaly: A Behavioral Explanation of Underpricing
II-1-1\\ The issuer is more informed than the investors: Welch (1989) and others assume that the issuer is better informed about its true value.
* The theory of signalling; Firm quality: The high quality issuers may attempt to signal their quality and their true value, and to distinguish themselves from the pool of low quality issuers, they voluntarily sell their shares at a lower price than the market beliefs. They leave deliberately money on the IPO table to deter […]
II-1-2\\ The investors are the most informed:
We are in the case of investors that are more informed than the other parties about the demand, the price they are willing to pay to acquire the IPO stocks, … Retour au menu : Investor Sentiment and Short Run IPO Anomaly: A Behavioral Explanation of Underpricing
* Information Revelation Theories:
To reduce this informational asymmetry, issuers tend to hire underwriters and to use a “Bookbuilding mechanism”. This common practice of Bookbuilding consists on setting a preliminary offer price range by the issuing firm, then the underwriter will take the role of trying to collect private information from investors about the offering which is called “indications […]
* Winner’s Curse:
Rock (1986) assumes that some investors are more informed than are other investors in general, the issue firm, and its underwriter. There is an imbalance of information between the potential investors themselves. These better informed investors bid only for attractively priced IPOs. In the case of unattractive offering, the better informed investors will not purchase […]
* Agency conflicts: The agency problems between the underwriter and the issuing firm.
Underpricing represents a wealth transfer from the IPO company to investors. These investors compete for allocations of underpriced stock, they can even try to collude with the underwriter by offering side-payments if they have underpriced stocks. Such side-payments could take the form of excessive trading commissions paid on unrelated transactions, or investment bankers might allocate […]
Abstract
Underpricing phenomenon has intrigued academics and practitioners over the past three decades, and has generated considerable research trying to clarify and to understand this short run puzzle: asymmetric information theories, IPO market efficiency theories and behavioral and sentiment approach. In this study, I regroup in the same model the most important explanations advanced earlier to […]
Acknowledgments
Merci à mes parents pour leur soutien tout au long des mes études, non seulement financier, mais également et surtout moral, mes mots ne pourront pas exprimer clairement combien vous avez été importants pour moi… Merci au professeur Cottier pour son aide et ses indications pour la réalisation de ce travail… Merci à Daniel Hammer, […]