Premium
New institutional investors in the IPO secondary market: Sentiment or fundamentals?
Author(s) -
Fu Xudong,
Hamilton Janet,
Lian Qin,
Tang Tian,
Wang Qiming
Publication year - 2021
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/jfir.12242
Subject(s) - initial public offering , business , institutional investor , investment (military) , monetary economics , market sentiment , secondary market , investment banking , finance , ask price , financial system , economics , corporate governance , stock exchange , politics , political science , law
We investigate new institutional investors that do not receive initial public offering (IPO) allocations but invest in the newly public firms after IPOs. We find that many institutions buy the stocks of IPO firms in the post‐IPO secondary market over time. In contrast to retail investors who chase hot IPOs, these new institutions invest in IPO firms with lower valuations at offerings and better fundamentals. These results suggest that new institutional investors' post‐IPO investment decisions are driven by publicly available information on firm fundamentals instead of investor sentiment. Long‐term performance tests confirm that this trading strategy helps institutions identify better quality IPOs.