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|Title: ||Hot Markets, Investor Sentiment, and IPO Pricing|
|Authors: ||Ljungqvist, Alexander P.|
|Issue Date: ||18-Sep-2001 |
|Series/Report no.: ||FIN-01-007|
|Abstract: ||Our model of the initial public offering process links the three main
empirical IPO ‘anomalies’ underpricing, hot issue markets,
and long-run under performance 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 under
performance 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.|
|Appears in Collections:||Finance Working Papers|
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