Optimism, divergence of investors’ opinions, and the long-run underperformance of IPOs

Naoshi Ikeda

Journal of Financial Markets, 2023, vol. 64, issue C

Abstract: The long-run underperformance of initial public offerings (IPOs) suggests that aftermarket prices are overvalued. According to the theory of heterogeneous beliefs and short-sale constraints, the aftermarket price of IPOs is overvalued; in addition, their performance deteriorates when the mean level of optimism and degree of divergence of investors’ opinions increase. I examine this phenomenon by estimating the mean and divergence of investor opinion distribution by focusing on Japanese auction-method IPOs. According to the results, both optimism and divergence cause the overvaluation of IPO’s first-day market price; however, only the mean level of optimism is statistically significant in explaining post-IPO underperformance.

Keywords: Initial public offering; Long-run performance; Heterogeneous beliefs; Optimism; Investor opinion; First-day market price (search for similar items in EconPapers)
JEL-codes: G12 G14 G32 G40 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:64:y:2023:i:c:s1386418122000891

DOI: 10.1016/j.finmar.2022.100800

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