SEARCH TRENDS AND IPO UNDERPRICING - EVIDENCE FROM US AND HONG KONG

Abstract

The current initial public offering (IPO) puzzle of underpricing and long run underperfomance is an intriguing phenomenon in current finance literature that has not been solved. Using Google search volume index from Google search trends as a proxy for retail investor attention, we found that it is able to explain IPO underpricing in both the United States and Hong Kong markets, and the model remains robust even in financial crisis. One unit increase in ASVI can lead to 3.27% increase in underpricing for US and 3.98% for Hong Kong. Search volume is able to explain the long run underperformance in the US market as well. However, we found less support for search volume in predicting long term returns in Hong Kong as well as for price revision. The study also showed how the financial crisis can have an impact on the model and has implications on how search patterns differ in different countries and the composition of retail investors in different countries.