Equity Issuances, Equity Mutual Fund Flows, and Noise Trader Sentiment

Abstract

We examine whether equity issuances (IPOs and SEOs) are in part driven by investor sentiment by using equity mutual fund flows to proxy for the rational and/or irrational components of aggregate demand for equity. We find that more firms issue equity when flows are higher and repurchase equity when flows are lower. More firms file with the SEC when predicted flows in the expected issuance month are greater. Price revisions are positively related to contemporaneous flows and unexpected flows. Initial returns are positively related to contemporaneous flows only for IPO issuances. These results are driven by retail, and not institutional, flows. Our evidence suggests that investor sentiment partially drives equity issuances.

Keywords: Initial public offerings (IPOs), Seasoned equity offerings (SEOs), Share repurchases, Equity mutual fund flows, Noise trader sentiment

JEL Classification: G20, G32