Abstract

We investigate the effect of the media hype that surrounds an IPO on a firm’s subsequent performance. Past empirical evidence suggests that firm performance often declines after an IPO (Loughran and Ritter, 1995). In this study we add to these explanations by investigating an aspect that was previously overlooked: Managerial overconfidence.

The IPO is a time of increased public and media attention (e.g., Demers & Lewellen, 2003; Pollock & Rindova, 2003; Reuer & Tong, 2010), we propose that such media coverage -- if it is positive -- can result in overconfidence of the firm’s upper management team. Building on theory and evidence from the behavioral decision-making literature we argue that this overconfidence affects the way managers interpret information about their firm and about it’s standing vis a vis its competitors. This misinterpretation can lead to erroneous predictions about the firm’s prospects as well as ultimately to the misallocation of resources. Together, these factors might explain why the IPO triggers a period of underperformance for the firm.

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