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http://hdl.handle.net/2451/26987
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| Title: | Does Prospect Theory Explain IPO Market Behavior? |
| Authors: | Ljungqvist, Alexander
Wilhelm, William J. Jr. |
| Keywords: | Prospect theory
Behavioral finance
Initial public offerings
Underpricing |
| Issue Date: | 24-Feb-2004 |
| Series/Report no.: | S-FI-04-03 |
| Abstract: | We derive a behavioral measure of the IPO decision-maker’s
satisfaction with the underwriter’s performance based on Loughran
and Ritter’s (2002) application of prospect theory to IPO
underpricing. We assess the plausibility of this measure by studying its
power to explain the decision-maker’s subsequent choices.
Controlling for other known factors, IPO firms are less likely to switch
underwriters for their first seasoned equity offering when our
behavioral measure indicates they were satisfied with the IPO
underwriter’s performance. Underwriters also appear to benefit
from behavioral biases in the sense that they extract higher fees for
subsequent transactions involving satisfied decision-makers. Although
our tests suggest there is explanatory power in the behavioral model,
they do not speak directly to whether deviations from expected utility
maximization determine patterns in IPO initial returns. |
| URI: | http://hdl.handle.net/2451/26987 |
| Appears in Collections: | Financial Institutions
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