Prospect Theory and the Long-Run Performance of IPO Stocks

摘要: We offer a new explanation for the long-run underperformance of IPO stocks using prospect theory. According to this theory, uncertain outcomes enter an investor's utility function through nonlinear transformation their probabilities. Small probability events are given more weight than in expected whereas median and large less weight. have extreme positive returns; hence they valued theory test our with Ritter's (1991) sample. Using parameter values consistent previous experimental studies, we find investors value IPOs same as seasoned prospective setting, even though formers' average returns much lower latters'.