Abstract
During an IPO the issuing firm experiences a dramatic visibility shock caused by a large amount of information released to the public. In this context the media play a pivotal role in conveying information to investors who mostly rely on second-hand and simplified news. We argue that the way in which news is presented may shape retail investors’ beliefs and in turn drive the demand for share and first-day returns. Based on over 2,800 US IPOs and over 27,000 newspaper articles we show that (a) positive tones are positively associated with IPO underpricing; (b) this effect is stronger when news is reported close to the IPO date or (c) by more reputable newspapers. As the article tone and IPO underpricing may be simultaneously driven by unobservable characteristics, we use the journalist’s idiosyncratic tone as an instrument to mitigate endogeneity concerns. However, our findings remain confirmed and robust even after controlling for the sentiment embedded in the SEC filings.
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