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Online activity of Internet users has proven very useful in modeling various phenomena across a wide range of scientific disciplines. In our study, we focus on two stylized facts or puzzles surrounding the initial public offerings (IPOs) – the underpricing and the long-term underperformance. Using the Internet searches on Google, we proxy the investor attention before and during the day of the offering to show that the high attention IPOs have different characteristics than the low attention ones. After controlling for various effects, we show that investor attention still remains a strong component of the high initial returns (the underpricing), primarily for the high sentiment periods. Moreover, we demonstrate that the investor attention partially explains the overoptimistic market reaction and thus also a part of the long-term underperformance.

Underpricing, underperformance and overreaction in initial public offerings: Evidence from investor attention using online searches