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Volume 16
Issue 2
Title Does individual investors’ sentiment explain Japanese IPO aftermarket performance? // Article in press
Author Norliza Che-Yahya, Yoshiyuki Matsuura
This study attempts to examine the influence of individual investors’ sentiment on Japanese IPO aftermarket performance (measured by return and trading volume on the first trading day as well as return on the first trading year). The individual investors’ sentiment, proxied by Google’s Search Volume Index (SVI), is observed from 15 days prior to the listing of an an IPO. 

This study proposes that IPOs will be on average overpriced in the listing day when individual investors’ sentiment is highly optimistic during the observation period. A higher positive initial return is expected in an IPO with higher investors’ optimism. Meanwhile, the possibility of flipping activity will cause a positive movement in trading volume of an IPO. The over-optimistic individual investors are expected to be sentimentally persistent even in the initial aftermarket motivating them to buy shares which are flipped by existing shareholders. Thus, high individual investors’ optimism in the pre-market is also expected to be positively related to trading volume on the first trading day. Further, the positive initial return is expected to occur in the short term as individual investors usually are uninformed investors who demand shares based on their personal preferences, which will last only in a short period after IPO listing. That is, following overvaluation hypothesis, price reversals should be predicted once the effect of individual investors’ optimism has disappeared causing the IPO to be underperformed during long term.

Using 520 Japanese IPOs issued from January 2010 to December 2019, the finding of this study reveals that individual investors’ sentiment is positively and significantly related to returns and trading volume on the first trading day. Meanwhile, return reversals are observed on the first trading year of IPO listing despite the insignificant influence of individual investors’ sentiment on return of IPOs on the first trading year.
Keywords Initial public offerings (IPOs), search volume index (SVI), individual investors’ sentiment, aftermarket performance, Japanese market
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