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Sentiment and information: How ‘over-optimistic’ investors influence differences of opinion and IPO pricing?

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  • Wu, Di
  • Bu, Danlu

Abstract

Miller (1977) predicts that under short-sale constraints, when emotional investors gain stronger bargaining power relative to rational investors, disagreement among investors widens, leading to overvaluation of IPOs. With a difference-in-differences model, we find that the 2021 reform of China's inquiry system expanded investor disagreement due to the introduction of overly optimistic investors, resulting in overvaluation of IPOs and poor initial returns. Influenced by overly optimistic investors, rational investors experience a partial increase in information levels, generating a masking effect in the emotional impact chain. Our study supports Miller's hypothesis, contributing to understanding the roles of ‘emotion’ and ‘information’ in shaping disagreement and enhancing IPO pricing efficiency.

Suggested Citation

  • Wu, Di & Bu, Danlu, 2024. "Sentiment and information: How ‘over-optimistic’ investors influence differences of opinion and IPO pricing?," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    • Handle: RePEc:eee:finana:v:95:y:2024:i:pb:s1057521924003685
    DOI: 10.1016/j.irfa.2024.103436
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    More about this item

    Keywords

    Difference of opinion; Initial public offering (IPO); Heterogeneous beliefs; Optimism rationality; First-day market price;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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