The role of optimistic news stories in IPO pricing

• Optimistic news stories are negatively associated with IPO underpricing.
• The negative association is stronger in the presence of underwriters and for smaller IPOs or IPOs with negative earnings.
• Results from relative valuation measure suggest that optimistic news stories do not inflate first day prices.
• Optimistic news stories are informative and reduce information asymmetry.
• Regulation mandating a ‘quiet period’ before the commencement of trading in IPOs does not appear to be necessary in the Australian environment.

This study investigates the influence of optimistic news stories on first-day pricing of initial public offerings (IPOs) in Australia between 1995 and 2005. Unlike the United States, Australia has no quiet-period regulation limiting the dissemination of information from media before IPO listing dates. We find that optimistic news stories are negatively associated with IPO underpricing. Results from a relative valuation model show that IPOs which received positive news stories ahead of the first trading day are not overpriced relative to their industry benchmarks. These results suggest that optimistic news stories mitigate information asymmetry and adverse selection problems. However, optimistic news stories do not appear to inflate the share price on the first day of trading. Our findings suggest that regulation mandating a ‘quiet period’ before the commencement of trading in IPOs is neither necessary nor desirable in the Australian environment.