Social Media Sentiment and IPO Pricing

Abstract

This study attempts to examine the impact of social media attention and sentiment on IPO pricing. Specifically, by using social media sentiment as a proxy for retail investors’ valuation, I attempt to examine the theoretical predictions in prior studies (Ljungqvist, Nanda and Sigh (2006), Cornelli, Goldreich, and Ljungqvist (2006), and Derrien (2005)) that overoptimism of sentiment investors leads to initial overpricing of IPO followed by long-term reversal. Using posts on Stocktwits during pre-IPO period, I have constructed measurements of investor attention and sentiment. The empiri- cal results are generally consistent with the theoretical predictions that retail investor overoptimism leads to higher IPO first day price run up and worse long-term perfor- mance. Additionally, using machine learning techniques to classify untagged posts, I have found similar results when sentiment measures are constructed by classified un- tagged posts. Results with sentiment measures constructed by these classified posts imply that more optimistic sentiment leads to a higher turnover rate shortly after IPO, indicating that informed investors are selling overpriced IPO shares to sentiment retail investors.