co-authors: David Goldreich, (London Business School) and Alexander Ljungqvist (NYU).
status: forthcoming in Journal of Finance.
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 excessive optimism) 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. Thus, small investors sometimes drive post-IPO prices temporarily upwards, but never downwards. This asymmetric pattern obtains because the larger (institutional) investors who are allocated IPO\ shares sell them to small investors in the aftermarket when the small investors are overoptimistic, but ignoring them when they are excessively pessimistic. Download a PDF file of this paper.