Hot Markets, Investor Sentiment and IPO Pricing

Alexander Ljungqvist (), Vikram Nanda and Rajdeep Singh ()

No 3053, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Our model of the initial public offering process links the three main empirical IPO ?anomalies? ? underpricing, hot issue markets, and long-run underperformance ? and traces them to a common source of inefficiency. We relate hot IPO markets (such as the 1999/2000 market for Internet IPOs) to the presence of a class of investors who are ?irrational? in the sense of having exuberant expectations regarding future performance. Underpricing and long-run underperformance emerge as underwriters attempt to maximize profits from the sale of equity, at the expense of these exuberant investors. Underpricing serves to compensate regular IPO investors for their role in restricting the supply of available shares and maintaining prices. The model is shown to be consistent with many aspects of the IPO process. It also generates a number of new empirical predictions.

Keywords: Initial public offerings; Hot issue markets; Behavioural finance; Long-run performance (search for similar items in EconPapers)
JEL-codes: G24 G34 (search for similar items in EconPapers)
Date: 2001-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Downloads: (external link)
https://cepr.org/publications/DP3053 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Hot Markets, Investor Sentiment, and IPO Pricing (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:3053

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP3053

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().