IPO Pricing in 'Hot' Market Conditions: Who Leaves Money on the Table?
Résumé
This paper explores the impact of investor sentiment on the pricing and aftermarket behavior of IPOs. Using a model in which the aftermarket price of IPO shares depends on the information about the intrinsic value of the company and investor sentiment, I show that IPOs can be overpriced, and still exhibit positive initial return. The predictions of the model are supported by a sample of recent French offerings, in which a fraction of the shares was reserved for individual investors. Individual investors' demand is positively related to market conditions. Moreover, large individual investors' demand leads to high IPO prices, large initial returns, and poor long-run performance.