Brand Awareness. First-Day Returns and Post-IPO Performance

The fact that IPOs are underpriced on average is well documented in the literature. In 2019 the average first-day return in the American market exceeded 14% which is a large number. Notwithstanding that a big number of researches have tried to resolve this prominent ‘puzzle’, it is still unexplained fully. Several academic papers argue that underpricing is a result of a private company’s valuation problem, agency problem or it is a conscious move. The most prominent explanatory variables which are used in empirical strategies aiming to analyze the underpricing problem are Offering size, Initial price, Tech sector dummy, Market situation, Underwriter’s reputation, and Age. My thesis argues that brand awareness is one more factor that should be taken into account when observing the underpricing puzzle. In my research, I analyzed 516 IPOs completed in the US market from 2015 through 2018 to answer the following questions: (1) does brand awareness affect first-day return, (2) do IPOs overpriced due to investor’s irrationality, (3) does making an IPO ‘hot’ deliberately makes a company more popular or increases operating performance? I found out that (1) a brand power has a positive and significant effect on the first- day return. Also (2) popular IPOs seem to be overpriced in addition to underpricing, meaning that fair price is higher than offer price but lower than the first-day close price. Finally, (3) I did not reveal any evidence that conscious underpricing induces higher popularity.