Social Media Emotions and IPO Returns (2306.12602v3)

Abstract: I examine potential mechanisms behind two stylized facts of initial public offerings (IPOs) returns. By analyzing investor emotions expressed on StockTwits and Twitter, I find that emotions conveyed through these social media platforms can help explain the mispricing of IPO stocks. The abundance of information and opinions shared on social media can generate hype around certain stocks, leading to investors' irrational buying and selling decisions. This can result in an overvaluation of the stock in the short term but often leads to a correction in the long term as the stock's performance fails to meet the inflated expectations. In particular, I find that IPOs with high levels of pre-IPO enthusiasm tend to have a significantly higher first-day return of 29.73%, compared to IPOs with lower levels of pre-IPO investor enthusiasm, which have an average first-day return of 17.59%. However, this initial enthusiasm may be misplaced, as IPOs with high pre-IPO investor enthusiasm demonstrate a much lower average long-run industry-adjusted return of -8.22%, compared to IPOs with lower pre-IPO investor enthusiasm, which have an average long-run industry-adjusted return of -0.14%. Diving deeper into the qualitative aspects of investor discourse, I find that messages rich in financial language or that bolster prevailing information drive my results. Additionally, a trend towards caution emerges among users who frequently engage with IPOs, perhaps a byproduct of lessons from past endeavors. Intriguingly, firms that enjoy high levels of pre-IPO optimism consistently garner post-launch enthusiasm, a trend at odds with their long-term under-performance.