Empirical evidence of attribute framing: the case of unsophisticated IPO investors

Purpose - The purpose of this paper is to investigate the empirical relevance of attribute framing in the financial marketplace. Design/methodology/approach - Incorporating a sample of German initial public offerings (IPOs) from 2010 to 2019, the author uses quantitative methods, including regression models and tests for the equality of means, to analyze whether unsophisticated investors are susceptible to attribute framing and whether this susceptibility reflects irrational behavior. Findings - Unsophisticated investors, who are typically retail investors, are susceptible to attribute framing. They are likely to subscribe to IPOs whose attribute “market valuation” is framed in a positive way, that is, IPOs with low offer prices. As low-priced IPOs are overvalued and underperform in the secondary market relative to high-priced IPOs, the susceptibility to attribute framing reflects irrational behavior. The findings are robust to controlling for sentiment. Research limitations/implications - Since this paper includes a relatively small sample from a single stock market, future research might employ alternative approaches. Social implications - When issuers and underwriters are able to exploit retail investors through attribute framing, the participation of these investors in the financial marketplace may finally decrease. Therefore, the financial literacy of retail investors needs to be improved. Originality/value - This paper is the first to provide empirical evidence of attribute framing in a financial markets context. While most previous research on IPO offer prices focuses on US stocks, this paper is the first to incorporate German stocks.