Media Sentiment and Its Role in Shaping IPO Performance

Abstract

The media performs an essential role in providing information regarding initial public offerings (IPOs) to investors. Often, public information about IPO companies is scarce and investors find it difficult to comprehend complex documents, making media a cost-effective and authentic source of information. This study explores how media sentiment affects the underpricing and initial aftermarket performance of IPOs using 3,124 media articles published from April 2019 to March 2022. In doing so, the authors employed textual sentiment analysis using the Loughran and McDonald dictionary to deduce the media net sentiment score. Subsequently, robust regression is conducted by incorporating the media sentiment, the volume of media articles, and other control variables. The result mentions that the way media present information has the potential to influence the decision of retail investors. The net sentiment score shows that the positive information in the media article makes investors optimistic about the prospects of the business. It boosts their confidence and creates more demand for shares, thereby increasing the IPO’s first-day market-adjusted abnormal return. Further, it has been discovered that media sentiment significantly influences initial aftermarket performance primarily due to the limited trading history available for the IPO company during the initial stage.