Seasonal affective disorder and the pricing of IPOs

Purpose – It has been found that stock market returns vary seasonally with the amount of daylight, and they attribute this effect to seasonal affective disorder (SAD), which is a psychological condition that causes depression and heightened risk aversion during the fall and winter months. The goal of this study is to examine whether this effect also manifests itself in the pricing of initial public offerings (IPOs). Design/methodology/approach – The authors conduct an empirical analysis on IPO data collected over the period 1986-2000. Specifically, we examine potential pricing differences between IPO that go public during the fall and winter months, relative to other issues. The paper begins by exploring differences on a univariate basis (i.e. testing via t-statistics), subsequently extending the analysis by controlling for firm and offer characteristics in a multiple regression framework. Findings – The paper finds that IPOs experience higher levels of underpricing in both the fall and winter months and that offer price revisions are higher during the winter months. Both of these results are consistent with SAD influencing the IPO pricing process. Originality/value – The results suggest that behavioral issues (i.e. the emotions of buyers) may have as much of an effect on the pricing of IPOs as more traditional characteristics. Further, the results imply that firms with flexible issuance schedules should avoid going public during months affected by SAD, thereby potentially reducing the cost of issuance.