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IPOs as Lotteries: Expected Skewness and First-Day Returns

IPOs as Lotteries: Expected Skewness and First-Day Returns

IPOs as Lotteries: Expected Skewness and First-Day

IPOs as Lotteries: Expected Skewness and First-Day Returns † T. Clifton Green and Byoung-Hyoun Hwang * December 2009 Abstract We find IPOs with high expected skewness experience significantly greater first-day returns. High expected skewness also is associated with a greater shift in holdings from institutions to individuals on the first day of trading, which suggests first-day returns are related to individual investors' preference for stocks with lottery-like features. The skewness effect is stronger during periods of high investor sentiment. Moreover, IPOs with high expected skewness subsequently earn substantially greater negative abnormal returns in the following three to five years. The results suggest IPO underpricing is related to differences in risk preferences between institutions and individuals. JEL: G11, G12, G14 Keywords: Lotteries, Gambling, Expected Skewness, IPO Underpricing † The authors would like to thank Russell Jame, Narasimhan Jegadeesh, Seoyoung Kim, Alexander Ljungqvist, and Dong Lou for helpful comments. * Green is from the Goizueta Business School, Emory University, 1300 Clifton Road, Atlanta, GA 30322. Hwang is from the Krannert School of Management, Purdue University, 403 W State Street, West Lafayette, IN 47907. Email: Clifton_Green@bus.emory.edu and bhwang@purdue.edu. 1

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