Abstract
Assuming that initial public offering (IPO) issuers can value their own firms more accurately, we test the hypothesis that the stock markets tend to overvalue IPOs. Using the lower limit of initial filing price range as issuers’ reservation price, we estimate the premiums of IPO first day closing price and first month closing price over the reservation price using 3,138 initial public offerings (IPOs) from 1983 to 2012. We find that the price premiums are positively related to proxies for market over-optimism and uncertainty. IPOs with higher price premiums have worse stock performance in the long run. The results are robust to various economic specifications. The findings are consistent with the argument that the stock markets get over- optimistic about IPOs from time to time.
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