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

Ikeda, Naoshi, Optimism, Divergence of Investors' Opinions, and the Long-Run Underperformance of IPOs (December 20, 2021). Available at SSRN: https://ssrn.com/abstract=2951535 or http://dx.doi.org/10.2139/ssrn.2951535

Naoshi Ikeda (Contact Author)

Nihon University ( email )

2-3-1 Misaki-chou, Chiyoda-ku
Tokyo, 101-8375
Japan

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