Social Media Sentiment and IPO Pricing

In this study, I attempt to examine the impact of social media sentiment and attention on IPO pricing. By using social media sentiment from Stocktwits as a proxy for retail valuation, I empirically examine the theoretical predictions in prior studies (Ljungqvist et al. (2006), Cornelli, Goldreich, and Ljungqvist (2006), and Derrien (2005)) that over-optimism of sentiment investors leads to initial overpricing of IPO followed by long-term reversals. Using posts on Stocktwits during the pre-IPO period, I construct investor attention and sentiment measurements. The empirical results are generally consistent with the theoretical predictions that retail investor over-optimism leads to higher IPO first-day price run-up and worse long-term performance. Additionally, using machine learning techniques to classify untagged posts, I find similar results where sentiment measures are constructed with classified untagged posts. Results with sentiment measures constructed by classified untagged posts imply that more optimistic sentiment leads to a higher turnover rate shortly after IPO, implying that informed investors are selling overpriced IPO shares to sentiment retail investors.