Does Prospect Theory Explain IPO Market Behavior?
Article first published online: 12 AUG 2005
The Journal of Finance
Volume 60, Issue 4, pages 1759–1790, August 2005
How to Cite
LJUNGQVIST, A. and WILHELM, W. J. (2005), Does Prospect Theory Explain IPO Market Behavior?. The Journal of Finance, 60: 1759–1790. doi: 10.1111/j.1540-6261.2005.00779.x
- Issue published online: 12 AUG 2005
- Article first published online: 12 AUG 2005
We derive a behavioral measure of the IPO decision-maker's satisfaction with the underwriter's performance based on Loughran and Ritter (2002) and assess its ability to explain the decision-maker's choice among underwriters in subsequent securities offerings. Controlling for other known factors, IPO firms are less likely to switch underwriters when our behavioral measure indicates they were satisfied with the IPO underwriter's performance. Underwriters also extract higher fees for subsequent transactions involving satisfied decision-makers. Although our tests suggest that the behavioral model has explanatory power, they do not speak directly to whether deviations from expected utility maximization determine patterns in IPO initial returns.