Optimism, Divergence of Investors' Opinions, and the Long-Run Underperformance of IPOs
36 Pages Posted: 14 Apr 2017 Last revised: 20 Dec 2021
Date Written: December 20, 2021
Abstract
The long-run underperformance of initial public offerings (IPOs) is a well-documented phenomenon implying an overvaluation of their aftermarket price. However, few studies simultaneously consider the impact of the mean level of optimism and the divergence of investors' opinions. By focusing on Japanese auction-method IPOs, this study directly and separately measures the mean level of optimism and the divergence of investors' opinions, thereby examining their effects on the first-day market price and the long-run performance of IPOs. The findings show that both cause the overvaluation of the first-day market price; however, only the mean level of optimism has a statistically significant explanatory power for post-IPO underperformance, implying that its post-IPO correction is more likely to drive the post-IPO underperformance phenomenon compared with the convergence of investors' opinions.
Keywords: initial public offering; long-run performance; heterogeneous beliefs; optimism; investor opinion
JEL Classification: G12; G14; G32
Suggested Citation: Suggested Citation