Media sentiment and IPO underpricing☆
Introduction
The pricing of IPOs as well as the price behavior during the first day of trade has been a widely investigated phenomenon since Ibbotson (1975). Since the earliest studies, the information asymmetry between the issuer and the underwriter on the one side and the investors on the other side has been pivotal in explaining the existence of underpricing. Quite surprisingly, in spite of the importance of the role of information asymmetry, past research has devoted little attention to the relationship between media information production and IPO valuation. As an exception, leveraging on the Merton (1987) argument of investor attention, Liu et al. (2014a and 2014b) show that IPO media coverage (i.e., number of newspaper articles) affects a number of IPO phenomena, such as stock's long-term value, liquidity, analyst coverage, institutional investor ownership, and the level of underpricing.
However, the impact of the media is not likely to be limited to the amount of information reported but likewise to the way media outlets treat the news. We argue that the tone (sentiment) used in the articles may change the reader's perception and contribute to shaping investor belief. More precisely, a benevolent or considerate media tone could increase investor interest, the demand for shares and, in turn, the IPO underpricing. Following this intuition, we attempt to provide an answer to four main questions. First, is the tone used by the media to report the news associated with the observed level of underpricing? Second, if media sentiment is associated with price behavior on the first day of trading, is the timing of the news likewise important? Or, in other words, is a certain tone used in the proximity of the IPO date more effective than the same sentiment far in advance of the offer? Third, are media outlets all equally important in affecting the IPO underpricing or do more reputable (or widespread) newspapers exhibit a greater role in shaping investor perception of the IPO (measured as the IPO performance around the offer)? Fourth, does media sentiment contain an explanatory power over and beyond the tones used in the IPO filings? Loughran McDonald (2013) show that the negative sentiment embedded in the S-1 forms is positively associated with the observed level of underpricing. Accordingly, if the media are influenced by the tone employed in the compulsory filings, the effect captured by the newspaper sentiment might only be an indirect proxy of the S-1 tones.
IPOs are a particularly interesting framework for investigating the role of the amount and the quality of information produced by the media, since before the listing the issuing firm is generally little known among retail investors; on the contrary, in the process of going public those firms experience a potential dramatic change in visibility, and the degree to which this occurs is greatly determined by the type of media coverage. As not all IPO firms receive equal attention from the media, we attempt to disentangle the effect of tone from the coverage in determining the observed level of underpricing, controlling for the other traditionally investigated firm and deal characteristics.
Within the different media channels, we restrict the analysis to the role of the printed newspaper because, differently from other media, space is very limited and valuable (Tewksbury and Althaus, 2000). Rationing in space directly leads to rationing in news coverage making the information reported more visible (Bucher and Schumacher, 2006, Tewksbury and Althaus, 2000). From the reader's perspective, having a definitive set of news allows the information content to be processed. This effect is obviously greater, ceteris paribus, if the newspaper reputation increases and the total space available in the newspaper decreases.
Another desirable feature of newspapers is audience discrimination. In this regards we are more interested in measuring the information flow towards the general public or retail (mass) investors rather than focusing on the specialized information directed to professionals (institutional investors). The difference between retail and professional investors is a pivotal concept in this study. In fact, we argue that information delivered by different means of communication to different kinds and segments of audience is able to produce different effects as measured by stock market valuations. We argue that informed investors, who have access to more detailed information and possess a greater ability in processing raw information, are less affected by the way financial newspapers present and convey the information on an IPO firm.
We analyze the news coverage and tone in over four hundred U.S. newspapers, for 2814 IPOs in the period 1995–2013. For each new issue we consider any news published in the selected media outlets in the time span ranging from the filing to the first trading date. This procedure allows us to collect and examine over 27,000 newspaper articles. We measure the tone of the news detecting the degree of positiveness, negativeness and uncertainty (positive, negative and uncertain sentiment). We find that a positive sentiment is positively associated with the level of observed underpricing, suggesting that first-day returns increase in response to a more benevolent press (we argue, as an effect of the larger generated demand).1 This effect goes over and above what can be explained by the amount of news related to the IPO (as in Liu et al., 2014a) and its economic magnitude is likewise important as one standard deviation increase in the positive tone generates a 2.5% rise in the IPO underpricing. These results remain robust even after having controlled for potential endogeneity issues (if the newspaper tone is endogenously determined with the IPO underpricing) and the sentiment of the compulsory SEC filings (as documented in Loughran and McDonald, 2013).
We believe this study contributes to the increasing stream of literature (Pollock and Rindova, 2003, Tetlock, 2007, Pollock et al., 2008, Bhattacharya et al., 2009, Tetlock, 2011, Engelberg and Parsons, 2011, Dougal et al., 2012, Solomon, 2012, Garcia, 2013, Chahine et al., 2015, Ahmad et al., 2016) that looks at the relationship between media and finance and, more specifically, at the economic effects of the way newspapers present information. Furthermore, this paper sheds some light on the importance of the timing of news and the reputation of the newspaper in producing sizeable economic effects. Confirming the intuition that investor attention is greatest around the first-day of trading and more stimulated by leading newspapers, we document that the impact of newspaper positive tones (and to some extent the coverage) is increasingly important as news is disclosed in the proximity of the IPO date and published by more reputable (and widespread) newspapers.
This paper is organized as follow: Section 2 contains a literature review of the two streams of related literature (IPO and the Media and finance) and puts forward some possible testable hypotheses. Section 3 illustrates the data and the methodology employed, as well as the descriptive statistics. Section 4 presents the empirical results and Section 5 concludes.
Section snippets
Related research and hypotheses development
In the literature the role of the media has become increasingly relevant. The cost of collecting, filtering and analyzing financial information acts as a barrier for uninformed investors, who can hence only rely on information that is publicly available and easy to access. Newspapers respond to both these characteristics as they (a) select - due to a scarcity of printed space - a limited amount of information and (b) present the information in a way that becomes accessible (comprehensible) to
Data sample
We collect a sample of 2814 IPOs in the U.S. stock markets between January 1995 and December 2013 from the SDC/Platinum Global New Issues database. We exclude from the sample real estate investment trusts (REIT), closed-end funds, unit IPOs and unit investment trusts, rights issues, spin-offs, equity carve-outs, financial firms (with SIC codes between 6000 and 6999), foreign firms, leveraged buy-out firms (LBO), shelf-registrations, withdrawn IPOs, and IPOs with an offer price lower than five
Results
The scope of this section is firstly to shed some light on the impact of media sentiment on the level of underpricing. After having shown that a positive tone is indeed associated with this dimension, we attempt to provide an answer to three main questions: (a) is the timing of the news disclosure or (b) the newspaper's reputation (or its diffusion) relevant to the observed underpricing? (c) does media sentiment produce an impact over and beyond the tone embedded in the IPO filings?
Conclusions
In the IPO process a large amount of private information is gradually released to the public. During the offer some investors (i.e., professional) have priority access and the needed skills to process a large amount of technical information; some others (i.e., retail investors) instead, greatly rely on the second-hand information that newspapers report. We argue that the way in which the media presents the information can influence the retail investor's belief and then cause an impact on the
Acknowledgements
We want to thank the editors and the reviewer. We want also to thank for their suggestions Massimiliano Barbi, Marco Bigelli, Andrea Carosi, Ettore Croci, Francois Degeorge, Robert Faff, Patrick Gagliardini, Meziane Lasfer, Craig M. Lewis, Marc Lipson, Stefano Mengoli, Rudi Palmieri, Jay Ritter, Andrea Rocci, Andrea Signori, Luigi Zingales, and all the participants at FMA Europe Venice, FMA US Las Vegas, FMA Doctoral Consortium, PFM Conference Paris, IFABS Barcelona. All errors remain ours.
References (52)
- et al.
Media-expressed negative tone and firm-level stock returns
J. Corp. Finan.
(2016) - et al.
Signalling by underpricing in the IPO market
J. Financ. Econ.
(1989) - et al.
Investment banking, reputation, and the underpricing of initial public offerings
J. Financ. Econ.
(1986) - et al.
Capital raising, underwriting and the certification hypothesis
J. Financ. Econ.
(1986) - et al.
Media news and earnings management prior to equity offerings
J. Corp. Finan.
(2015) Signalling by direct disclosure under asymmetric information
J. Account. Econ.
(1986)Price performance of common stock new issues
J. Financ. Econ.
(1975)- et al.
Grandstanding, certification and the underpricing of venture capital backed IPOs
J. Financ. Econ.
(2004) - et al.
IPO first-day returns, offer price revisions, volatility, and form S-1 language
J. Financ. Econ.
(2013) - et al.
Information salience, investor sentiment, and stock returns: the case of British soccer betting
J. Corp. Finan.
(2009)
Why new issues are underpriced
J. Financ. Econ.
Institutional allocation in initial public offerings: empirical evidence
J. Financ.
The market for “lemons”: quality uncertainty and the market mechanism
Q. J. Econ.
All that glitters: the effect of attention and news on the buying behavior of individual and institutional investors
Rev. Financ. Stud.
The role of the media in the internet IPO bubble
J. Financ. Quant. Anal.
The relevance of attention for selecting news content. An eye-tracking study on attention patterns in the reception of print and online media
Communications
In search of attention
J. Financ.
The Fox News effect: media bias and voting
Q. J. Econ.
Who owns the media?
J. Law Econ.
Journalists and the stock market
Rev. Financ. Stud.
Who blows the whistle on corporate fraud?
J. Financ.
Media versus special interests
J. Law Econ.
The corporate governance role of the media: evidence from Russia
J. Financ.
The Media and Asset Prices
The causal impact of media in financial markets
J. Financ.
Media coverage and the cross-section of stock returns
J. Financ.
Cited by (114)
Terror threat and investor sentiment: International evidence
2024, Global Finance JournalMedia sentiment and management earnings forecasts: Evidence from China
2024, Finance Research LettersCOVID-19 media sentiment and IPO underpricing
2024, Economics LettersMedia uncertainty and risk-taking
2024, International Review of Financial AnalysisSocial capital and the pricing of initial public offerings
2023, Journal of Empirical Finance
- ☆
An old version of this paper was previously circulated under the title “Media sentiment and the pricing of IPOs”.