Driving the Presence of Investor Sentiment: The Role of Media Tone in IPOs

Abstract

Using word frequency analysis, we define media bias as the number of positive in excess of negative news articles in the pre-IPO period and examine whether media bias can account for post-IPO market performance. We find robust evidence that media bias is positively related to IPO first-day returns while negatively related to long-run abnormal returns. We also find a negative relation between media bias and the rate of allocation among retail investors, indicating that positive media bias can bring more retail investors to the primary market. Further analysis suggest that media bias is positively associated with retail trading in the immediate aftermarket, post-IPO liquidity, analyst coverage, and institutional shareholdings, which implies that media bias can improve investor participation in the secondary market. Taken together, these findings are consistent with the view that media is an important channel through which sentiment drives retail demand for IPOs in the primary and secondary markets, causing post-IPO prices to deviate from fundamentals in the short run.