DP4448 Investor Sentiment and Pre-Issue Markets

Author(s): Francesca Cornelli, David Goldreich, Alexander P. Ljungqvist
Publication Date: June 2004
Keyword(s): grey markets, investor sentiment, IPOs
JEL(s): G24, G30
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4448

What role do sentiment investors play in the pricing of newly listed stocks? We derive conditions under which we can distinguish between sentiment and rational pricing behaviour and test for the rationality of small investors? demand for new stock issues using data from pre-issue (or ?grey?) markets in Europe. Under sentiment, the model predicts asymmetric relations between the prices at which small investors trade new stock issues in the grey market and i) the subsequent issue price set by the investment bank, ii) prices in the early after-market, and iii) the degree of stock price reversal in the long run. Our empirical results suggest that sentiment demand is present and influences the pricing of newly listed firms.