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Journal of Finance Vol. 61 No. 3 2006

Investor Sentiment and Pre‐IPO Markets

Francesca Cornelli1; David Goldreich2; Alexander Ljungqvist3,4,5,6

1 London Business School · 2 Rotman School of Management · 3 Economic Policy Institute · 4 Cornell University · 5 New York University · 6 Brunel University of London

open access

Abstract

We examine whether irrational behavior among small (retail) investors drives post‐IPO prices. We use prices from the grey market (the when‐issued market that precedes European IPOs) to proxy for small investors' valuations. High grey market prices (indicating overoptimism) are a very good predictor of first‐day aftermarket prices, while low grey market prices (indicating excessive pessimism) are not. Moreover, we find long‐run price reversal only following high grey market prices. This asymmetry occurs because larger (institutional) investors can choose between keeping the shares they are allocated in the IPO, and reselling them when small investors are overoptimistic.

DOI
10.1111/j.1540-6261.2006.00870.x
Volume
61
Issue
3
Pages
1187-1216
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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