Investor sentiment and short run IPO anomaly: a behavioral explanation of underpricing

MASTER'S THESIS

Investor Sentiment and Short Run IPO Anomaly:

A Behavioral Explanation of Underpricing

Ines MAHJOUB

Table of contents

Abstract ..............................................................................................6

INTRODUCTION .....................................................................................7

Section 1- Short run IPO anomaly and traditional explanations ......................10

Introduction .............................................................................................10

I- Underpricing anomaly: a persistent phenomenon that characterizes IPO market .....11

I-1\ Underpricing definition ......................................................................11

I-2\ A persistent anomaly in time ..................................................................12

I-3\ A persistent anomaly in all countries .........................................................13

I-4\ A persistent anomaly in all industries .........................................................15

II- Theoretical explanations of short run underpricing: A literature review .............15

II-1\ Asymmetric information ..................................................................16

II-1-1\ The issuer is more informed than the investors .......................................16

II-1-2\ The investors are the most informed .........................................................19

* Information Revelation Theories ..................................................................19

* Winner's Curse .....................................................................................22

* Agency conflicts ....................................................................................23

II-2\ Symmetric information ...........................................................................25

II-2-1\ Risk premium ....................................................................................25

II-2-2\ Characteristics of the Initial Public offering ................................................26

* Risk ......................................................................................................26

* Issue size .............................................................................................27

* Bargaining power ....................................................................................28

II-2-3\ Lawsuit avoidance: legal liability .........................................................29

II-2-4\ Underpricing as a substitute of marketing expenditures ..............................30

II-2-5\ Internet Bubble ...........................................................................31

II-2-6\ Price stabilization and partial adjustment ................................................32

Section 2- Behavioral explanations .........................................................34

Introduction .............................................................................................34

I- Definitions .............................................................................................35

I-1\The sentiment's notion ...........................................................................36

I-2\ Hot IPO market's phenomenon ..................................................................37

I-3\ Investors typology ...........................................................................40

II- Literature review of behavioral explanations ................................................42