FIN-04-006 |
NYU Stern School of Business |
February 2004
Alexander P. Ljungqvist and William J. Wilhelm, Jr.
ABSTRACT
We derive a behavioral measure of the IPO decision-maker’s satisfaction with the underwriter’s
performance based on Loughran and Ritter’s (2002) application of prospect theory to IPO
underpricing. We assess the plausibility of this measure by studying its power to explain the
decision-maker’s subsequent choices. Controlling for other known factors, IPO firms are less
likely to switch underwriters for their first seasoned equity offering when our behavioral measure
indicates they were satisfied with the IPO underwriter’s performance. Underwriters also appear
to benefit from behavioral biases in the sense that they extract higher fees for subsequent
transactions involving satisfied decision-makers. Although our tests suggest there is explanatory
power in the behavioral model, they do not speak directly to whether deviations from expected
utility maximization determine patterns in IPO initial returns.
Alexander Ljungqvist
Institution: Stern School of Business, New York University
Phone: (212) 998-0304
Fax: (212) 995-4233
Email: aljungqv@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~aljungqv/
William J. Wilhelm, Jr.
Institution: McIntire School of Commerce, University of Virginia
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