The Effect of Investor Sentiment on IPO Underpricing - Evidence from the Nordic Market

Abstract

The heavily researched, yet unsolved, IPO underpricing phenomenon has been by investigated by academics for decades and offered multiple explanations as to why it exists. Analysing a sample of 526 IPOs in the Nordic market between 2005 and 2018 which is found to be underpriced by 8.13%, this thesis explores whether investor sentiment is a determinant of this observed underpricing. It does so by applying Baker and Wurgler’s recognized sentiment index as a measure of investor sentiment and tests its relationship to underpricing while controlling for multiple IPO characteristics. Furthermore, periods of positive and negative investor sentiment, hot and cold market periods, and industry classifications are considered to shed further light on the relationship. Using multiple linear regression models, I find evidence of a statistically significant relationship between investor sentiment and underpricing. Additionally, underpricing is found to be considerably higher for companies debuting during periods of investor optimism, but the application of multiple regression models on sub-samples as well as t-tests on the displayed mean difference, fail to statistically prove the effect. Obtained results show some contradictions to previous studies as well. I find that underpricing decreases during hot market periods and that this effect is strengthened during periods of positive investor sentiment. This thesis provides some supporting evidence to previous literature’s findings that investor sentiment and underpricing are related, and adds to the existing research by using an approach not yet tested on the Nordic Market. Key words: IPO underpricing, Investor Sentiment, Nordic, Hot IPO Markets, Cold IPO Markets, Industry Classifications