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IPO market timing with uncertain aftermarket retail demand

Francisco Santos

Journal of Corporate Finance, 2017, vol. 42, issue C, 247-266

Abstract: We develop a simple model of IPO timing with uncertain aftermarket retail demand. Firms prefer to go public when they expect to exploit sentiment-driven investors' overvaluations by setting offer prices above fundamental value. However, some firms have profitable investment opportunities that require immediate financing. This generates two empirical predictions: (i) the quality of the issuers' investments and (ii) their long-run performance decrease with expected retail demand. Using average IPO first-day returns as a proxy for retail demand, we find strong empirical support for the model. First, following the IPO, issuers in low-underpricing periods become more profitable and have higher investment rates than their peers. In contrast, issuers in high-underpricing periods have similar investment rates as their control firms, but become less profitable. Second, issuers in high-underpricing periods tend to underperform in the long-run, while issuers in low-underpricing periods do not.

Keywords: Behavioral finance; Initial public offerings; Investor sentiment; Market timing (search for similar items in EconPapers)
JEL-codes: G14 G24 G32 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:corfin:v:42:y:2017:i:c:p:247-266