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IPO Pricing in “Hot” Market Conditions: Who Leaves Money on the Table?



    1. 1Rotman School of Management, University of Toronto
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    • This article is a substantially revised version of one chapter of my dissertation at HEC. The paper was previously entitled “Issuers, Underwriters, and Institutional Investors: Why They All Like the Book-building IPO Procedure.” I would like to thank my advisor, François Degeorge, for his constant support and advice throughout this research. I am also grateful to Alessandro Citanna, Thierry Foucault, Larry Glosten, Richard Green (the editor), Ulrich Hege, Philippe Henrotte, Dima Leshchinskii, Stephano Lovo, Jan Mahrt-Smith, Sophie Moinas, Jacques Olivier, Michael Rockinger, Bruno Solnik, Alex Stomper, Kent Womack, and an anonymous referee for their precious comments. All remaining errors are my own.


This paper explores the impact of investor sentiment on IPO pricing. Using a model in which the aftermarket price of IPO shares depends on the information about the intrinsic value of the company and investor sentiment, I show that IPOs can be overpriced and still exhibit positive initial return. A sample of recent French offerings with a fraction of the shares reserved for individual investors supports the predictions of the model. Individual investors' demand is positively related to market conditions. Moreover, large individual investors' demand leads to high IPO prices, large initial returns, and poor long-run performance.