We examine how investor sentiment affects the cross-section of stock returns. Theory predicts that a broad wave of sentiment will disproportionately affect stocks whose valuations are highly subjective and are difficult to arbitrage. We test this prediction by studying how the cross-section of subsequent stock returns varies with proxies for beginning-of-period investor sentiment. When sentiment is low, subsequent returns are relatively high on smaller stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme-growth stocks, and distressed stocks, consistent with an initial underpricing of these stocks. When sentiment is high, on the other hand, these patterns attenuate or fully reverse. The results are consistent with predictions and appear unlikely to reflect an alternative explanation based on compensation for systematic risk.

We investigate directly whether analyst behavior influenced the likelihood of banks winning underwriting mandates for a sample of 16,625 U.S. debt and equity offerings sold between December 1993 and June 2002. We control for the strength of the issuer’s investment-banking relationships with potential competitors for the mandate, prior lending relationships, and the endogeneity of analyst behavior and the bank’s decision to provide analyst coverage. We find no evidence that aggressive analyst recommendations or recommendation upgrades increased their bank’s probability of winning an underwriting mandate after controlling for analysts ’ career concerns and bank reputation. Our findings might be interpreted as suggesting that bank and analyst credibility are central to resolving information frictions associated with securities offerings.

Not necessarily. The fundamental value of a firm increases with uncertainty about average future profitability, and this uncertainty was unusually high in the late 1990s. We calibrate a stock valuation model that includes this uncertainty, and compute the level of uncertainty that is needed to match the observed Nasdaq valuations at their peak. This uncertainty seems plausible because it matches not only the high level but also the high volatility of Nasdaq stock prices. We also show that uncertainty about average profitability has the biggest effect on stock prices when the equity premium is low.

Our model of the initial public offering process links the three main empirical IPO ‘anomalies’ – underpricing, hot issue markets, and long-run underperformance – and traces them to a common source of inefficiency. We relate hot IPO markets (such as the 1999/2000 market for Internet IPOs) to the presence of a class of investors who are ‘irrational’ in the sense of having exuberant expectations regarding future performance. Underpricing and long-run underperformance emerge as underwriters attempt to maximize profits from the sale of equity, at the expense of these exuberant investors. Underpricing serves to compensate regular IPO investors for their role in restricting the supply of available shares and maintaining prices. The model is shown to be consistent with many aspects of the IPO process. It also generates a number of new empirical predictions.

Conflicts of interest and efficient contracting in IPOs We study the role of underwriter compensation in mitigating conflicts of interest between companies going public and their investment bankers. Making the bank’s compensation more sensitive to the issuer’s valuation should reduce agency conflicts and thus underpricing. Consistent with this prediction, we show that contracting on higher commissions in U.K. IPOs leads to significantly lower underpricing: a one percentage point increase in the commission rate reduces the initial return by 11 percentage points, after controlling for other influences on underpricing. Moreover, we present evidence consistent with issuers choosing commission rates optimally. Overall, our results indicate that issuers and banks contract efficiently in U.K. IPOs.

Individual and institutional investors can trade German initial public equity offerings on an as–if/when–issued basis before the start of secondary trading. Using a novel data set of pre – and post–IPO trades made by a sample of clients at a large German retail broker, the paper documents that retail investors both are willing to overpay and end up overpaying for IPOs, especially following periods of high returns in recent new issues. IPOs that are more aggressively bought by retail investors in the pre–IPO market or on the day of the IPO post higher first-day returns, but also experience lower aftermarket returns, controlling for firm characteristics such as size and book–to–market ratio. In short, sentiment – expectations about asset values unwarranted by fundamentals – drives retail purchases of IPOs and appears to have a transitory effect on prices.

an anonymous referee, and seminar participants at the Colloquium on Behavioral Finance at the NYU School of

Evidence from Successful IPOs ABSTRACT: Venture capitalist (VC) reputation is a valuable trait, which yields important competitive benefits. Yet a generally accepted measure is lacking. To address this need, we investigate the relation of alternative VC reputation measures to especially successful venture investments, namely IPOs and post-IPO long-run firm performance. Post-IPO firm performance is measured by three well known standards: industry-adjusted operating performance, marketto-book ratio, and long-run listing survival. We find that a VC’s market share of VC-backed IPOs has the strongest and most consistent positive association with these post-IPO long-run performance metrics and with the frequency with which a VC’s portfolio firms subsequently successfully go public. We also explore the relation between VC reputation and private equity networks, IPO demand, post-IPO VC involvement and corporate governance. We find that more reputable VCs excel on all these dimensions, which helps explain why firms backed by more reputable VCs have greater IPO success and better post-IPO performance.

In this paper, we examine the word content of 2,044 initial IPO prospectuses along with their full time series of amendments. We find that the relative size of four key document sections predicts the magnitude of the partial price adjustment, first day IPO returns, and long-run post-offer performance. By assessing the word similarity between IPOs, we show that the lead underwriter is influential in the writing of the Prospectus Summary but not in the MD&A, indicating that the latter’s authorship is most likely management. We find two key results that motivate a new explanation of the partial adjustment phenomenon. First, issuing firm managers perform a surprisingly integral role in the bookbuilding process as greater management disclosure generates higher offer prices and superior long-run performance. Second, litigation risk plays an important function in strategic disclosure, and only negative information learned during from bookbuilding is disclosed in amendments to the prospectus. Thus, positive information is withheld for strategic or proprietary reasons while negative information is disclosed as a hedge against litigation risk. ∗Securities Exchange Commission and University of Maryland, respectively. The Securities and Exchange Commission disclaims responsibility for any private publication or statement by any of its employees. This study expresses the authors views and does not necessarily reflect those of the Commission, the Commissioners or other members of the staff. Hanley can be reached at

31 st March 2008Abstract: A central measure of the efficiency of the Initial Public Offering (IPO) market is the extent to which issues are underpriced. Legal, regulatory, disclosure and underwriting pressures have moulded the IPO market since World War II. This paper presents new and comprehensive evidence covering British IPOs since World War I. We find that during the period from 1917 to 1945, public offers were underpriced by an average of only 3.80%, as compared to 9.15 % in the period from 1946 to 1986 (when the UK stock market was deregulated). This substantial rise is robust to the inclusion of variables controlling for changes in firm risk and method of issue, and improvements in disclosure and the emergence of prestige underwriters.