Media Sentiment and IPO Stock Performance

One of the ways to eliminate uncertainty around initial public offerings is media coverage. It helps investors to get information they do not have access to. We argue that not only exact figures and some significant data about an IPO may affect investors’ beliefs but media sentiment as well. To prove the idea we calculate various tones of media coverage for each IPO in the sample and find significant positive (negative) effect on first-day returns from corresponding sentiments. This means that “bad” news (sometimes even uncertain) may decrease first-day returns at IPO. To examine ways how to avoid the negative effect we consider some positive signals such as Venture-backing capital and Underwriter’s reputation to analyze what factor will be more powerful. We use interaction terms for opposite variables and find that both VC-backing and prestigious underwriters are able to eliminate negative effect from uncertain news about an IPO. According to the negative tone, VC-backing is able to diminish negative effect of “bad” news but not remove it at all, while prestigious underwriters in such case lead to even stronger negative effects. We assume that this happens because investors trust negative news and therefore decrease their demand for company stocks while prestigious underwriters try to set up offer prices closer to the real one. Both factors lead to lower first-day returns and consequently lower underpricing.