ENTREPRENEURIAL OPTIMISM AND THE MARKET FOR NEW ISSUES

Luís Santos‐Pinto and Michele Dell'Era ()
Authors registered in the RePEc Author Service: Luis Santos-Pinto ()

International Economic Review, 2017, vol. 58, issue 2, 383-419

Abstract: This article analyzes the impact of entrepreneurial optimism on the market for new issues. We find that the existence of optimists generates a new reason for entrepreneurs to own equity in their firms. We show that optimism is a natural explanation for why some new issues are underpriced and others overpriced. We also show that the impact of optimism on entrepreneurs' equity holdings depends on the number of optimists, absolute risk aversion, and cash flow variance. Optimism makes entrepreneurs worse off. In contrast, optimism can make outside investors better off when entrepreneurs signal firm value by retaining shares and underpricing.

Date: 2017
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