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Investor Sentiment and Pre-IPO Markets





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    • Cornelli is at London Business School and the Cente for Economic Policy Research. Goldreich is at the Rotman School of Management, University of Toronto and the Center for Economic Policy Research. Ljungqvist is at the Stern School of Business, New York University and the Centre for Economic Policy Research. This work was completed while Goldreich was at London Business School. We thank Alex Stomper for generously providing some of the data. Thanks for helpful comments go to Pierluigi Balduzzi, Nick Barberis, Walid Busaba, Wayne Ferson, Laura Field, Francisco Gomes, Steve Kaplan, Vojislav Maksimovic, Paul Marsh, Harold Mulherin, N.R. Prabhala, Jay Ritter, Rob Stambaugh (the editor), Mike Weisbach, Lucy White, Kent Womack, two anonymous referees, and seminar participants at Arizona State University, Boston College, Brunel University, Columbia Business School, Cornell University, IESE, Indiana University, Michigan State University, the Norwegian School of Management in Oslo, the Norwegian School of Economics and Business Administration in Bergen, Oxford University, Tilburg University, Tulane University, the University of Amsterdam, the University of Exeter, the University of Maryland, the University of Minnesota, the University of Zurich, the NYSE/Stanford Conference on Entrepreneurial Finance and IPOs, the LSE-LBS Corporate Finance Workshop, the 2004 FIRS Conference on Banking, Insurance and Intermediation in Capri, the Spring 2004 NBER Corporate Finance Meeting, the 2004 EVI Conference at Dartmouth, and the 2005 AFA Meetings in Philadelphia. Dmitry Makarov provided excellent research assistance.


We examine whether irrational behavior among small (retail) investors drives post-IPO prices. We use prices from the grey market (the when-issued market that precedes European IPOs) to proxy for small investors' valuations. High grey market prices (indicating overoptimism) are a very good predictor of first-day aftermarket prices, while low grey market prices (indicating excessive pessimism) are not. Moreover, we find long-run price reversal only following high grey market prices. This asymmetry occurs because larger (institutional) investors can choose between keeping the shares they are allocated in the IPO, and reselling them when small investors are overoptimistic.