Information, market sentiment and corporate finance : the role of investors' attention
by Ling Cen
ix, 103 p. : ill. ; 30 cm
Essay One: What Can We Learn from IPO Cornparables Besides Valuation? IPO Shadow Stocks, Oversubscription Rates and Investor Sentiment in the Hong Kong Market...[ Read more ]
Essay One: What Can We Learn from IPO Cornparables Besides Valuation? IPO Shadow Stocks, Oversubscription Rates and Investor Sentiment in the Hong Kong Market
IPO comparable stocks that are discussed by the local media around the IPO filing period are known in Hong Kong as IPO shadow stocks. I show that IPO shadow stocks experience significant price run-ups during the IPO filing period of the public offering tranche. The level of run-ups is positively associated with the level of media coverage of IPO stocks before the IPO filing date. Utilizing a unique dataset that provides information on IPO subscription rates, I find that higher run-ups of IPO shadow stocks are associated with higher IPO demand. The subscription rate is highly relevant in explaining IPO initial returns, and its presence overshadows most other factors commonly studied in the literature, such as prior market and industry returns. I further examine whether both the price run-up and oversubscription are due to leakage of information from institutional subscribers' demand (information diffusion hypothesis), or stimulated attention by over-optimistic investors in "hot issue" markets (stimulated attention hypothesis). In my empirical analysis, I find significant price reversals of IPO shadow stocks after the IPO listing dates. Further, the price run-ups of IPO shadow stocks of smaller firms, non-H-share firms and those subject to more severe short sale constraints have stronger predictive power for IPO demand. These results support the stimulated attention hypothesis and are inconsistent with the information diffusion hypothesis, suggesting that investor sentiment may be the dominant determinant of IPO demand in the Hong Kong market.
Essay Two: When the Tail Wags the Dog: Industry Leaders, Limited Attention and Spurious Cross-Industry Information Diffusion
Hou (2007) finds that within an industry, the stock returns of larger firms lead those of smaller firms, suggesting an intra-industry information diffusion process. Most industry leaders, however, have business segments in other industries (henceforth, minor-segment industries) while most small firms are pure players operating in one industry only. Do investors indiscriminately price the pure players based on the industry leader returns, even though the latter might reflect information about the industry leader's minor- segment industries that are irrelevant for the pure players? We document both a strong contemporaneous and a lead-lag relation in stock returns between the firms from industry leaders' minor-segment industries and pure players in the industry leaders' major-segment industry. The effect is economically significant and is especially strong when industry leaders are more diversified and more publicly recognized. Our results are consistent with investors paying inadequate attention to firm-specific information when trading pure players and choosing to focus on industry leaders instead - a form of category learning. However, since the industry leaders themselves are conglomerates, attention-constrained investors are unable to distinguish the effects of minor segments from those of major segments. As a result, the major-segment industry pure players are affected by the information from the minor-segment industries that are fundamentally unrelated to the major-segment industry. Our results are not due to alternative explanations based on market factors, other potential missing common factors or economic relationships between pure players and minor-segment industries.