The Role of Buzz in the IPO Process

Abstract

Initial public offerings (IPOs) represent a pivotal stage for entrepreneurs as they allow access to key resources, but they are also fraught with informational challenges. IPOs are informationally opaque environments that present entrepreneurs and investors alike with the possibility of either great financial success, or failure. Given the information opacity and asymmetry that characterize the process, researchers have long been interested in examining what factors investors might interpret as signals of firm quality, resulting in more favorable IPO outcomes. While contemporary entrepreneurship scholars have recently taken a greater academic interest in the signals of investor perceptions, the field remains largely unaware as to how and why these signals form, adapt, and impact judgment decisions throughout the IPO process. In this dissertation, I examine whether buzz – the valence and volume of investor sentiment surrounding a firm’s IPO – impacts valuation decisions and firm outcomes throughout the IPO process. Building on signaling theory, social contagion theory, and recent research in online marketplaces, this dissertation is the first study to examine buzz valence and volume as costly signals of market sentiment in the IPO context. Further, I propose here a new conceptualization of IPO buzz that focuses on the valence and volume of investor sentiment generated and disseminated through social interactions via social contagion. Using a sample of US IPO firms from 2017-2021, I test whether buzz is influenced by early IPO valuations during the IPO process. Further, I examine whether buzz has a reciprocal relationship with IPO valuations by influencing the assessments of institutional investors, leading to IPO valuation changes and subsequent IPO performance outcomes. Lastly, I examine what effects institutional factors have on the role of investor buzz in the IPO process.