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Does Prospect Theory Explain IPO Market Behavior?
Author(s) -
LJUNGQVIST ALEXANDER,
WILHELM WILLIAM J.
Publication year - 2005
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2005.00779.x
Subject(s) - underwriting , initial public offering , explanatory power , business , decision maker , utility maximization , measure (data warehouse) , actuarial science , maximization , econometrics , economics , microeconomics , accounting , computer science , mathematical economics , database , philosophy , epistemology , management science
We derive a behavioral measure of the IPO decision‐maker's satisfaction with the underwriter's performance based on Loughran and Ritter (2002) and assess its ability to explain the decision‐maker's choice among underwriters in subsequent securities offerings. Controlling for other known factors, IPO firms are less likely to switch underwriters when our behavioral measure indicates they were satisfied with the IPO underwriter's performance. Underwriters also extract higher fees for subsequent transactions involving satisfied decision‐makers. Although our tests suggest that the behavioral model has explanatory power, they do not speak directly to whether deviations from expected utility maximization determine patterns in IPO initial returns.