The Irrational and Rational Sides of IPO Flippers
42 Pages Posted: 19 Apr 2018 Last revised: 3 May 2018
Date Written: April 2, 2018
Abstract
Initial public offering (IPO) flippers are investors who are initially allocated shares at the offer price and immediately resell them. Using a large sample of 2003 IPOs in China from January 1995 to December 2012, we find that on average, flipping accounts for 65.92% of total negotiable shares. We also note that investors flip a greater percentage of their allocation when the IPO is hot and extra hot rather than cold, which confirms the existence of disposition effects. We also examine the impact of the first-day flipping activity on subsequent IPO performance. Using different performance measures, we confirm the negative relationship between flipping activity and IPO aftermarket performance. Specifically, we find that a 10% increase in flipping activity lowers the three-year IPO aftermarket annual performance by 3.6%. Our results are in line with the divergence of opinion hypothesis and asymmetric information.
Keywords: Flipping Activity, IPO, Long-Term Performance, Disposition Effect, Divergence of Opinion
JEL Classification: G14, G30, G32
Suggested Citation: Suggested Citation