Going public constitutes a real driver for the development of a company, enabling it to
increase its equity capital and to overcome the constraint that its founders are no
longer able to provide the capital needed for its expansion, and enabling it to diversify its
sources of financing without the need for debt. It is also a way to provide liquidity by creating
an opportunity to convert all or some founders and shareholders’ wealth into cash
immediately or at a future date. Going public is also an opportunity to clarify the company’s
business and strategy and to think about the company’s future growth. Not forgetting the role
of going public and being listed in enhancing the company’s credibility and strengthening its
image and reputation. When a company decides to go public, shares offered in the stock
market should be correctly and truly valued. Issuers should also time the Initial Public
Offering to coincide with a favourable period (Hot market) to succeed their first introduction
in the market. But the question is, if the issuing firm’s managers are shrewd enough to value
the company’s shares and to choose a hot market period, why underpricing is a persistent
anomaly characterizing the IPO market and why so much money is leaving on the IPO table?
Stoll and Curley (1970), Logue (1973), Reilly (1973) and Ibbotson (1975), are the first
who documented that when companies go public, the first day closing price is systematically
higher than the issue price at which the public offering was introduced in the market. They are
the first who documented the first day underpricing phenomenon. And Ibbotson (1975) is the
first who offered a list of possible explanations for underpricing, many of which were
formally explored by other authors in later work.
The underpricing phenomenon has inspired a large theoretical literature over decades
trying to give a relevant and a convincing explanation to this first day anomaly. It has
intrigued academics and practitioners over the past three decades and has generated
considerable research trying to clarify and to understand this phenomenon. The first
explanations that were advanced are based on the informational asymmetry between the key
parties of an IPO: issuing firm, underwriter and investors. These theories have been very
popular among academics and practitioners for decades and have been considered as the most
relevant and convincing explanation to the short run IPO anomaly. However, other theories
have been introduced asserting the informational transparency and lucidity and the IPO
market efficiency, since the first theories based on asymmetric information are unlikely to
give a relevant explanation to the surprisingly and severe level of underpricing of 63.5%
reached in 1999 and 2000. This severe level of the internet boom years exceeded any level
previously seen. Researches are continuing, and it is fair to say that this anomaly is not
satisfactorily resolved. It is still a puzzle, since nor the informational asymmetry theories
neither the IPO market efficiency theories are likely to give a convincing and a reliable
explanation to this short run IPO phenomenon.
Many researchers come to the conclusion that IPO future researches should turn to
behavioral approach and sentiment notion. Research effort should focus more on behavioral
explanations to clarify and to explain the short run IPO behaviour and the underpricing
anomaly: a new path trying to understand and to explain this persistent anomaly. Turning to
behavioral explanations seems to be the most promising area of research to understand the
short run IPO behaviour.
We can say that the underpricing anomaly may be the most controversial area of IPO
research. Research effort has provided numerous analytical advances and empirical insights,
but underpricing is not yet explained and the research effort is continuing.
In this thesis, I answer these two main problematics:
What are the most relevant and reliable explanations to the underpricing anomaly from
the long list of explanations advanced?
If we rely on behavioral explanations based on investors’ sentiment to explain this
phenomenon, what type of investors is more conducting the underpricing phenomenon and
the first day returns?
To answer these two main questions, I present in a first section the phenomenon and its
persistence in time, for all the countries and for all the industries. I present the two main
categories of explanations: informational asymmetry and theories asserting the informational
transparency and the IPO market efficiency. I summarize the most important findings and
results of researchers that have considered these theories in their studies. In a second section, I
present the most important studies and papers that have considered the sentiment explanation
and the investors’ behaviour as the most convincing and relevant driver and determinant of
IPO underpricing. In this section, I give an idea about the application of the behavioral and
sentiment approach to clarify and to understand the IPO patterns by numerous researchers and
I shed light on the importance of the sentiment investors in the IPO market.
Finally, in the third section, I regroup the most important explanations that have been
advanced in the same model to determine which of these explanations characterizes best a
sample of 217 U.S IPOs for 2006 and 2007. In the context of a unified framework and model,
I present the three theories: asymmetric, symmetric and behavioral approach.
For the behavioral approach, I use direct measures of sentiment obtained from the survey data
of American Association of Individual Investors and Investors Intelligence. I distinguish
between the sentiments of the two types of investors: individual and institutional investors, to
answer the second question.
The main result is that sentiment is a primary driver of underpricing and a relevant
explanation to this short run anomaly. Moreover, individual investors are those driving the
first day closing prices and are more conducting the short run IPO puzzle than the institutional
investors.