Systematic Sentiment, Idiosyncratic Sentiment, and the IPO Pricing Process

We examine the impact of investor sentiment on the IPO pricing process. We propose that investor sentiment has a systematic component, which is due to market-wide sentiment, and an idiosyncratic (residual) component. We find some evidence that systematic sentiment impacts IPO valuations, but this relationship is not robust. We find that systematic sentiment is positively related with IPO underpricing and this relationship is more pronounced for difficult-to-arbitrage firms. Systematic sentiment is negatively related to long-run IPO returns. However, the evidence about the impact of idiosyncratic sentiment on IPO pricing process is less compelling. Overall, our findings suggest that the behavioral biases of market participants influencing IPO pricing process have a systematic market component.