Working Paper: CEPR ID: DP4448
Authors: Francesca Cornelli; David Goldreich; Alexander P. Ljungqvist
Abstract: What role do sentiment investors play in the pricing of newly listed stocks? We derive conditions under which we can distinguish between sentiment and rational pricing behaviour and test for the rationality of small investors? demand for new stock issues using data from pre-issue (or ?grey?) markets in Europe. Under sentiment, the model predicts asymmetric relations between the prices at which small investors trade new stock issues in the grey market and i) the subsequent issue price set by the investment bank, ii) prices in the early after-market, and iii) the degree of stock price reversal in the long run. Our empirical results suggest that sentiment demand is present and influences the pricing of newly listed firms.
Keywords: grey markets; investor sentiment; IPOs
JEL Codes: G24; G30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| grey market prices (pgm) (P22) | issue prices (pi) (P22) |
| grey market prices (pgm) (P22) | aftermarket prices (pam) (L11) |
| issue prices (pi) (P22) | aftermarket prices (pam) (L11) |
| grey market prices (pgm) high (E30) | issue prices (pi) high (P22) |
| grey market prices (pgm) low (P22) | issue prices (pi) aligned with fundamental value (L11) |
| grey market prices (pgm) high (E30) | aftermarket prices (pam) high (E30) |
| aftermarket prices (pam) high (E30) | reversal to fundamental values (D46) |