Media coverage and IPO underpricing

摘要

We document that media coverage before the IPO day significantly relates to IPO underpricing. The relation is asymmetrical, with positive media coverage associated with more underpricing while no such relation exists for negative media coverage. The relation is statistically robust and economically significant. Conditioning on positive price revision, one extra piece of media coverage is associated with about two percentage points greater underpricing. There are three potential explanations for this phenomenon. Benveniste and Spindt's (1989) information generation theory, Loughran and Ritter (2004)'s prospect theory and investor sentiment theory, depending on whether the media coverage captures private information, public information or investor sentiment. Media coverage is a good proxy for private information possessed by the informed investors in Benveniste and Spindt's theory. The model suggests that the informed investors have no incentive to hide their good news after they reveal it to the underwriters. On the contrary, they may prefer to reveal it to the public if they expect to benefit from high demand in the secondary market. Therefore, media coverage could be another proxy for the informed investors' private information besides the price revision. We show that the positive relation between positive media coverage and underpricing is stronger when ex ante uncertainty is greater. The relation is stronger when the news signals used to identify positive and negative media coverage are more related to private information and less related to public information. Furthermore, we fail to find any relation between positive media coverage and IPO firms' long run under-performance. To conclude, our test results are more consistent with Benveniste and Spindt's information generation theory.