Are IPO investors rational? Evidence from closed-end funds. Issue 14 (14th November 2017)

• Record Type: Journal Article
• Authors: Gemmill, Gordon; Thomas, Dylan C.
• Is Part Of: European journal of finance. Volume 23:Issue 14(2017)
• Page Start: 1311
• Page End: 1334
• Publication Date: 2017-11-14
• Subjects: initial public offerings -- closed-end funds -- sentiment; Finance -- Periodicals; Finance -- Europe -- Periodicals; International finance -- Periodicals; 332.094
• DOI: 10.1080/1351847X.2015.1115774
• Languages: English
• ISSNs: 1351-847X

Abstract

Abstract : Why buy a closed-end fund at IPO, when it is likely to trade at a discount in a few months' time? One theory suggests that buying a new fund is justified by an initial period of investment outperformance. A second theory is that new funds are launched to provide access to assets that are temporarily illiquid and to exploit the subsequent liquidity gain while a third theory asserts that buyers of new issues are not fully rational but are influenced by time-varying sentiment. This paper tests the three theories using data from UK-traded closed-end equity-fund IPOs over 1984–2006. The empirical results provide strong support for the influence of sentiment but provide little or no support for the two other theories.