The impact of investor sentiment on IPO underpricing

Abstract

We find that the abnormal trading by small investors is positively related to IPO underpricing. In addition to this firm specific investor sentiment, the market wide investor sentiment is also positively related with IPO underpricing significantly. Investor sentiment is positively related with IPO underpricing for both high and low investor sentiment. We show that for harder to arbitrage firms the positive relation between IPO underpricing and sentiment is more pronounced. We also find that the volatility of IPO underpricing is positively related to investor sentiment and infer that it is not only information asymmetry that matters, but also the degree of excess optimism or pessimism of investors in the market.