Are IPO investors rational? Evidence from closed-end funds

Gordon Gemmill and Dylan C. Thomas

The European Journal of Finance, 2017, vol. 23, issue 14, 1311-1334

Abstract: Why buy a closed-end fund at IPO, when it is likely to trade at a discount in a few months’ time? One theory suggests that buying a new fund is justified by an initial period of investment outperformance. A second theory is that new funds are launched to provide access to assets that are temporarily illiquid and to exploit the subsequent liquidity gain while a third theory asserts that buyers of new issues are not fully rational but are influenced by time-varying sentiment. This paper tests the three theories using data from UK-traded closed-end equity-fund IPOs over 1984–2006. The empirical results provide strong support for the influence of sentiment but provide little or no support for the two other theories.

Date: 2017
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DOI: 10.1080/1351847X.2015.1115774

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