Abstract
This study tests speculative bubble theory, which assumes investors’ heterogeneous beliefs and short-sale constraints, as a potential explanation for the long-run underperformance of initial public offerings (IPOs). The prediction of speculative bubble theory is difficult to test directly because of the unobservability of the distribution of investors' opinions. This study thus focuses on Japanese auction-method IPOs and estimates the distribution of investors' beliefs. It finds that both the level of optimism and the divergence of investors' opinions cause the overvaluation of the first-day market price, but that the former has more explanatory power for post-IPO underperformance.
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