IPO first‐day returns: Skewness preference, investor sentiment and uncertainty underlying factors

• Date: 01 September 2014
• Author: Dorsaf Ben Aissia
• Published date: 01 September 2014
• DOI: http://doi.org/10.1016/j.rfe.2014.06.001

IPO first-day returns: Skewness preference, investor sentiment and

uncertainty underlying factors

Dorsaf Ben Aissia ⁎

Departmentof Finance and Accounting,Higher Instituteof Accounting and Managementof Enterprises,Campus universitaire,2010 Manouba, Tunisia

abstractarticle info

Articlehistory:

Received18 March 2014

Receivedin revised form 4 June 2014

Accepted9 June 2014

Availableonline 20 June 2014

JEL classification:

G11

G12

G14

Keywords:

IPO first-day returns

Idiosyncraticskewness

Investorsentiment

Uncertaintyunderlying factors

In this paper, we investigate the initial public offering (IPO) first-day returns. Our focus is to examine the irrational

component of the agent behavior towards IPO lotteries. Based on 234 French IPOs performe d between 2002 and

2012, we find thatIPOs with high initial returnshave higher idiosyncraticskewness, turnoverand momentum.

This findingprovides empirical evidencefor investors'preferencefor stockswith lottery-likefeaturesand investor

sentiment. In addition, we show that the skewness preference and the investor sentiment effect are stronger

during periods of favorable market conditions. Our results are robust to the integration of uncertainty underlying

factors.

© 2014 ElsevierInc. All rights reserved.

1. Introduction

Recent behavioral finance literature highlightsthe relevance impact

of investor irrational behavior on in itial public offering first-dayreturns

(Green & Hwang, 2012;Ljungqvist, Nanda, & Singh, 2006; Loughran &

Ritter, 2004). A first lineof research related to our work group studies

that focuson investor preference

1

for skewedstocks. These studiessup-

ply evidencethat skewness preferenceleads to abnormal stock returns.

Barberis and Huang (2008) examine the asset pricing implications of

Tversky and Kahneman's (1992) cumulative prospecttheory and find

that, in contrastto the prediction of a standard expected utility model,

a positivelyskewed security can be overpricedand can earn a negative

average excess return. Chang, Chri stoffersen, and Jacobs (2013) and

Amaya, Christoffersen, Jacobs, and Vasquez (2013) report that stocks

with high skewness exhibit low returns on avera ge. Still, Conrad,

Dittmar, and Ghysels(2013) and Li, Sub rahmanyam, and Yang (2014)

note that ex-ante more negatively (po sitively) skewed returns are

associated with subsequent hig her (lower) returns. Recently, Green

and Hwang (2012) test the skewne ss preference hypothesis for IPO

stocks since IPOs broadly prese nt lower probabilities of extreme

positive profits. They find that IPOs with hi gh expected skewness

experiencesignificantly greater first-day returns.

A second extend literatureof behavioral finance assumes that post

IPO's returns are explained by the investor sentiment.Derrien (2005)

indicates,using a model in which the post IPO pricedepends on the in-

formation about the intrinsic value of the company and the inve stor

sentiment, that IPOs can be overpr iced and exhibit positive initial

return. Cornelli, Goldreich,and Ljungqvist (2006) lend support to this

evidence. They examinepre-IPO's trading of retail and small investors

and find largerfirst-day returns. They arguethat the presence of inves-

tors' sentimentaffects prices in the post IPO's market. Ljungqvistet al.

(2006) model an IPO company's optimal response to the presence of

sentiment investors and short- sale constraints. They find that the

issuers take advantage of optimistic valuations of the retail investors.

Stambaugh, Yu, and Yuan (2011) an d Baker, Wurgler, and Yuan

(2012) also outline the effect of investor sentiment on a broad set of

anomalies in cross-sectional stock returns and emphasize that when

sentiment is high, future return s are low on relatively difficult to

arbitrageand difficult to value stocks.

Finally, a growing number of studi es substantiate the idea that

uncertainty matters in IPO's valua tion (Loughran & McDonald,

forthcoming;Lowry, Officer,& Schwert, 2010).To control for thisuncer-

tainty, they used several variables on the basis of their ability to ex plain

Reviewof Financial Economics 23 (2014)148–154

⁎Tel.: +216 71600705.

E-mailaddress: dorsaf_bi@yahoo.fr.

1

A relevantliterature has exploredthe nonexpected utilitytheories to incorporatethe

skewnesspreference. Brunnermeierand Parker (2005) showthat in an optimal expecta-

tionmodel of portfoliochoice, investorsoverestimatetheir return andexhibit a preference

for skewness.Brunnermeier, Gollier,and Parker (2007) documentthat households' port-

foliosare not perfectly diversified.Mitton and Vorkink(2007) lend supportto this finding

and indicate that portfolio retu rns of under-diversified investors are more positi vely

skewedthan those of diversified investors.

http://dx.doi.org/10.1016/j.rfe.2014.06.001

1058-3300/©2014 Elsevier Inc. All rightsreserved.

Contents listsavailable at ScienceDirect

Review of Financial Economics

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