The Role of Investor Sentiment in the
IPO Aftermarket

Abstract

This article uses two price signals on the cusp of an IPO, price revision (change from pre-offer to offer price) and initial return (change from offer to market open price), as proxies of investor sentiment, which appears to have potent and lingering effects over a six-month aftermarket window. For instance, firms that rank high on our investor optimism scale exhibit considerable initial price momentum and sharp reversals. The article shows that a mechanical trading strategy designed to exploit aftermarket patterns generates economically significant risk-adjusted returns compared to a buy-andhold benchmark. Robustness checks indicate that it is important to implement the strategy as early as possible and the key driver is the serial dependence in aftermarket returns.