Do Investors Overweight Personal Experience? Evidence from IPO Subscriptions

We find a strong positive link between past IPO returns and future subscriptions at the investor level in Finland. Our setting allows us to trace this effect to the returns personally experienced by investors; the effect is not explained by patterns related to the IPO cycle, or wealth effects. This...

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Bibliographic Details
Published in:The Journal of finance (New York) 2008-12, Vol.63 (6), p.2679-2702
Main Authors: KAUSTIA, MARKKU, KNÜPFER, SAMULI
Format: Article
Language:English
Subjects:
Economic psychology
Financial investments
Financial portfolios
Finland
Initial public offering
Initial public offerings
Investment analysis
Investment policy
Investment strategies
Investment trusts
Investors
Learning
Learning experiences
Outcomes of education
Overweight
Psychological reinforcement
Rates of return
Stock markets
Studies
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Summary:We find a strong positive link between past IPO returns and future subscriptions at the investor level in Finland. Our setting allows us to trace this effect to the returns personally experienced by investors; the effect is not explained by patterns related to the IPO cycle, or wealth effects. This behavior is consistent with reinforcement learning, where personally experienced outcomes are overweighted compared to rational Bayesian learning. The results provide a microfoundation for the argument that investor sentiment drives IPO demand. The paper also contributes to understanding how popular investment styles develop, and has implications for the marketing of financial products.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2008.01411.x