Does sentiment drive the retail demand for IPOs?

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 actual when-issued trades made by a sample of clients at a large German retail broker during 1999 and 2000, the paper documents that retail buyers consistently overpay for initial public offerings (IPOs) in the when-issued market relative to the immediate aftermarket. The observed willingness to overpay points to sentiment as a driver of retail trading decisions. Consis- tent with this interpretation and with sentiment affecting prices, IPOs that are aggressively bought by individuals in the when-issued market exhibit high first-day returns as well as poor aftermarket returns relative to benchmarks of similar stocks.