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Does Sentiment Drive the Retail Demand for IPOs?

Published online by Cambridge University Press:  01 February 2009

Daniel Dorn
Daniel Dorn*
Affiliation:
LeBow College of Business, Drexel University, 101 N. 33rd St., Philadelphia, PA 19104. [email protected]
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Abstract

Individual and institutional investors can trade German initial public equity offerings on an as-if/when-issued basis before the start of secondary trading. Using actual when-issued trades made by a sample of clients at a large German retail broker during 1999 and 2000, the paper documents that retail buyers consistently overpay for initial public offerings (IPOs) in the when-issued market relative to the immediate aftermarket. The observed willingness to overpay points to sentiment as a driver of retail trading decisions. Consistent with this interpretation and with sentiment affecting prices, IPOs that are aggressively bought by individuals in the when-issued market exhibit high first-day returns as well as poor aftermarket returns relative to benchmarks of similar stocks.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 1 , February 2009 , pp. 85 - 108
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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