Prague Economic Papers 2017, 26(2):188-197 | DOI: 10.18267/j.pep.603

IPO Price, Heterogeneous Priors and Gradual Information Flows

Yu Jiang1, Xianming Fang2,*, Haofei Wang3
1 Yu Jiang, Department of Finance and Insurance, Nanjing University, Nanjing, Jiangsu, China (yujiang@nju.edu.cn)
2 Department of Finance and Insurance, Nanjing University, Nanjing, Jiangsu, China (fxmfxm@nju.edu.cn)
3 Shanghai Advanced Institute of Finance, Shanghai Jiaotong University, Shanghai, China (hfwang2.12@saif.sjtu.edu.cn)

This paper attempts to develop a theoretical framework that builds on heterogeneous beliefs to explain the financial anomalies related to IPO stocks. In particular, we develop a dynamic analysis framework to study the valuation of IPO price and the short-term probability of falling below IPO price based on perspectives of investors' heterogeneous priors and gradual information flow. Our study shows that the valuation of IPO price increases as the degree of heterogeneity due to investors' heterogeneous priors increases. Moreover, the short-term probability of falling below IPO price increases as the degree of investors' cognitive biases caused by gradual information flow increases.

Keywords: heterogeneous priors, gradual information flow, IPO price, probability of falling below IPO price
JEL classification: G02, G14

Prepublished online: September 8, 2016; Published: April 1, 2017  Show citation

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Jiang, Y., Fang, X., & Wang, H. (2017). IPO Price, Heterogeneous Priors and Gradual Information Flows. Prague Economic Papers26(2), 188-197. doi: 10.18267/j.pep.603
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