Are Investors Rational When Valuing Loss Firms?

Cécile Carpentier, Frédéric Romon and Jean-Marc Suret

Journal of Behavioral Finance, 2018, vol. 19, issue 2, 177-189

Abstract: The authors examine whether high valuation of loss firms really exists and can be explained by behavioral factors. This valuation may originate from irrational behavior of optimistic investors who prefer lottery-like stocks, or from rational expectations of firms' profitability. Using a sample of small Canadian firms going public, the authors show that both individual investors and underwriters price loss firms higher than profit firms, everything being equal. Post-IPO 3-year underperformance does not differ statistically between loss and profit firms. Investors thus apparently behave irrationally for all firms, but their irrationality does not seem greater for loss firms.

Date: 2018
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DOI: 10.1080/15427560.2017.1374277

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