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Entrepreneurial Optimism And The Market For New Issues

Author

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  • Luís Santos‐Pinto
  • Michele Dell'Era

Abstract

This article analyzes the impact of entrepreneurial optimism on the market for new issues. We find that the existence of optimists generates a new reason for entrepreneurs to own equity in their firms. We show that optimism is a natural explanation for why some new issues are underpriced and others overpriced. We also show that the impact of optimism on entrepreneurs' equity holdings depends on the number of optimists, absolute risk aversion, and cash flow variance. Optimism makes entrepreneurs worse off. In contrast, optimism can make outside investors better off when entrepreneurs signal firm value by retaining shares and underpricing.

Suggested Citation

  • Luís Santos‐Pinto & Michele Dell'Era, 2017. "Entrepreneurial Optimism And The Market For New Issues," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(2), pages 383-419, May.
    • Handle: RePEc:wly:iecrev:v:58:y:2017:i:2:p:383-419
    DOI: 10.1111/iere.12221
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