Do Investors Overweight Personal Experience? Evidence from IPO Subscriptions




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    • Markku Kaustia and Samuli Knüpfer are at Helsinki School of Economics, Department of Accounting and Finance. The paper benefited greatly from comments by Campbell Harvey (the editor) and the anonymous referee. We thank Malcolm Baker, Matti Keloharju, Mikko Leppämäki, Juhani Linnainmaa, Darius Palia, Vesa Puttonen, Elias Rantapuska, Sami Torstila, Dimitri Vayanos, Jeffrey Wurgler, and especially Jay Ritter for comments. We also thank the participants at the 2008 American Finance Association meeting in New Orleans, 2007 European Finance Association meeting in Ljubljana, and 2007 Financial Management Association European meeting in Barcelona, as well as at London School of Economics, London Business School, UCLA, University of Michigan, INSEAD, and New York University seminars. Both authors acknowledge financial support from the Academy of Finland and the Finnish Foundation for Advancement of Securities Markets. Knüpfer acknowledges as well support from the Helsinki School of Economics Foundation, Kemira Foundation, and Okobank Group Research Foundation.


We find a strong positive link between past IPO returns and future subscriptions at the investor level in Finland. Our setting allows us to trace this effect to the returns personally experienced by investors; the effect is not explained by patterns related to the IPO cycle, or wealth effects. This behavior is consistent with reinforcement learning, where personally experienced outcomes are overweighted compared to rational Bayesian learning. The results provide a microfoundation for the argument that investor sentiment drives IPO demand. The paper also contributes to understanding how popular investment styles develop, and has implications for the marketing of financial products.