Two Strategies for Selling IPOs : A Pre and Post IPO Bubble Analysis

We study why capital asset markets in which buyers pay too much, well in excess of the asset’s long-term equilibrium price, could exist. A well-known example is the initial pricing of IPO shares. Two mechanisms that could generate an artificial short-term temporary demand for the asset are identified and empirically tested. We find that in markets that consist mostly of small unsophisticated investors, more intense selling efforts by the seller, or its agent, could create a temporary high demand (The ‘Push’ created demand hypothesis). In the second mechanism, which involves a market with a mix of both small unsophisticated and large sophisticated investors, a combination of price increase and the possibility of short-term profit, e.g., flipping in IPOs, could induce the sophisticated investors to participate, and help create the appearance of high demand consistent with Shiller’s Impresario Hypothesis. Our empirical results from in the pre-IPO bubble period (1981-1996) yield evidence supporting these two mechanisms. Under-demanded small IPO issues are ‘pushed’ by the brokers, while some under demanded large IPO issues instead increase the offer price, with large first day turnover characteristics of flipping. Both types of issues experience large and significant negative long-term returns, as share prices eventually return to the equilibrium price. For our post-IPO bubble period (1997-2017), the Impresario Hypothesis is empirically supported, indicating a shift in selling mechanisms post-bubble