Introduction:
Short run IPO anomaly may be the most controversial area of IPO research. The research effort has provided numerous analytical advances and empirical insights trying to explain the first day price run up. Many explanations were introduced and studied, but all these theories are unlikely to explain the persistent pattern of high initial returns during the first trading day. It is fair to say that this anomaly is not satisfactorily resolved and is still a puzzle.
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, since nor the asymmetric theories neither the explanations based on the informational symmetry are likely to give a relevant and a reliable explanation to the underpricing anomaly, mainly after the surprisingly and severe level of underpricing reached in 1999 and 2000, the internet boom years. The explanations that have been advanced earlier are unable to explain the severe percentage of underpricing observed in this period, and turning to behavioral explanations seems to be a necessity to resolve this short run IPO puzzle.
Ritter and Welch (2002), for example, advance clearly that asymmetric information which has been the most convincing explanation for decades, is not the primary driver of IPO phenomena and asymmetric information models that have been popular among academics, have been overemphasized. Ritter and Welch believe that future progress in the IPO literature will come from non rational explanations.
This argument is supported by Ljungqvist (2004) who comes to the conclusion that IPO researchers should focus on behavioral approaches to explain why the extent of underpricing varies so much over time.
Future researches have to focus more on behavioral explanations and turning to the behavioral approach describing the behaviour of irrational investors and their sentiment seems to be a necessity since the explanations and the theories that were advanced earlier are unlikely to clarify and to explain the short run IPO puzzle, especially after the dot-com boom. During this period, the IPO market has reached a severe level of underpricing never seen before. So one can ask about the suitability of “traditional” explanations and theories, and turning to behavioral explanations seems to be the most promising area of research. Going further, Cook, Jarrell and Kieschnicke (2003) conclude that the role of investor sentiment is more important than previously thought.
The tendency of behavioral approach and investor sentiment is not a new field not again discovered. The investor sentiment was introduced earlier in the 1990’s by Welch who presented the informational cascade theory. But this approach has attracted more attention, has intrigued more and more researchers and has taken all its impetus in this decade. Many researchers tried to introduce this behavioral approach to explain the short run IPO anomaly and the research effort is continuing.
In this second section, I present the Behavioral Approach in a first paragraph by defining important notions as investor sentiment, hot IPO market and distinguishing between individual investors and institutional investors. Then, in a second paragraph, I summarize the most important studies advanced asserting the presence of sentiment investors and sentiment as the primary and main driver of underpricing phenomenon. I present the most important findings and the main proxies used by researchers to value the investor sentiment.