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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27268
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| Title: | What makes issuers happy? Testing the Prospect Theory of IPO Underpricing |
| Authors: | Ljungqvist, Alexander P.
Wilhelm, William J.Jr. |
| Keywords: | Prospect theory
Behavioral finance
Initial public offerings
Underpricing |
| Issue Date: | 10-Dec-2003 |
| Series/Report no.: | FIN-03-038 |
| 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)
prospect theory of 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/2451/27268 |
| Appears in Collections: | Finance Working Papers
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