Driving the Presence of Investor Sentiment: The Role of Media Tone in IPOs

We read all newspaper articles to measure the pre-IPO media tone for 1,068 Chinese book-built IPOs issued from 2005–2013. We document significant and robust evidence that media tone is related to high IPO first day returns and low long-run abnormal returns. One positive newspaper article can predict an increase of 2.38 – 9.42 percentage points in first-day returns and a decrease of 3.26 – 10.09 percentage points in postIPO three-year abnormal returns. Further analysis reveals that high pre-IPO media tone is positively associated with first-day retail trading and retail demand in the IPO market, indicating that pre-IPO media tone can enhance the presence of investor sentiment around the IPO event. Taken together, these findings are consistent with our hypothesis that media tone can influence post-IPO prices through the presence of investor sentiment, leading to high first-day returns and low long-run stock performance.