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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26536

Title: Hot Markets, Investor Sentiment, and IPO Pricing
Authors: Ljungqvist, Alexander P.
Nanda, Vikram
Singh, Rajdeep
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.
URI: http://hdl.handle.net/2451/26536
Appears in Collections:Finance Working Papers

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