Professor of Finance
Investor Horizon Clientele; Local Short-term Presence; Illiquidity; IPO Underpricing; JEL Classification: G24; G28;
The authors study how the heterogeneity in investment horizons of local institutional investors affects the IPO market. Because short-term investors prefer more liquid stocks than long-term investors do and IPO stocks have high liquidity in the aftermarket, a higher presence of local short-term investors should be related to higher IPO underpricing. They test this hypothesis by constructing a geography-based measure of “local short-term presence”, which captures the cross-sectional variations in regional investor horizon clienteles. The authors find that local short-term presence is strongly positively related to IPO underpricing. The results are consistent with the view that investor-base heterogeneity affects asset returns.