Abstract

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.

Citations