Investor sentiment and the underperformance of technology firms initial public offerings

• Behavioral finance can explain IPO underperformance anomaly.
• Investor sentiment at IPO affects the performance of technology IPO shares.
• Irrational individual investor sentiment negatively affects the shares’ performance.
• Rational institutional investor sentiment increases shares’ long-run outlook.
• Investors’ overconfidence increases technology shares’ performance.

This research examines the effect of individual and institutional investor sentiment toward the overall market at the time of Initial Public Offering (IPO) on the aftermarket performance of technology IPO shares. The study which is based on 1346 U.S. technology IPOs completed between 1992 and 2009 shows that the irrational component of individual investor sentiment negatively affects shares’ aftermarket performance: the more optimistic individual investors are at the time of IPO, the lower the shares’ aftermarket return. On the other hand, the rational component of institutional investor sentiment does not affect the shares’ short-run performance, yet positively affects their long-run performance. In contrast with prior theoretical models this paper shows that investor overconfidence positively affects technology IPO shares’ aftermarket performance. The paper extends the behavioral finance literature by providing evidence on the negative role played by noise trading in affecting technology and biotechnology IPO shares performance.

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