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* I would like to thank Frank Dobbin, Christopher Marquis, Peter ...

ENDNOTES 1 Instrumentally rational action (zweckrational) is social action by purposive ac**to**rs who, based upon expectations of the behavior of other ac**to**rs and objects, calculate an expedient means **to** achieve rationally pursued end goals. Value-rational action (wertrational) is social action by purposive ac**to**rs who strive **to** achieve end goals oriented **to**wards an “ethical” standard valued for its own sake. Action may be instrumentally rational in the choice of means, but value-rational in the choice of end goals (Weber [1922] 1978:24-36). 2 I have altered the original notations in the economic models **to** present a consistent set of notations throughout this paper. P refers **to** price, superscript * refers **to** predictions, nonsuperscripted P are observed prices, subscript t refers **to** time period, subscript or superscript R and S refer **to** rational and sentiment inves**to**rs, respectively; p or P() refers **to** probability; R refers **to** returns; Q refers **to** quantity; δ refers **to** sentiment; and ε **to** uncorrelated disturbance terms. 3 Subjective expected utility (SEU) describes how rational ac**to**rs choose between decision � alternatives; formally, ac**to**rs maximize SEU value ����� ��� � ���� ������� where U(.) is the individual’s utility function, xi is the vec**to**rs of goods in the i th state of the world, and pi is the probability of the i th state of the world occurring. Savage ([1954] 1972) demonstrated that preferences should adhere **to** seven axioms for SEU maximization **to** occur. Bayes’ theorem relates the conditional probabilities of events A and B: ���É�� � ���É������ . Rational ac**to**rs ���� should update their probability of B occurring when receiving new information A based on Bayes’ theorem. 4 Formally: ���� �� ���� � ��� ��� � �� ����� ���� � �� ���� � ��� �� where Rf is the risk free rate, Km is the market rate of return, SMB (small minus big) and HML (high minus low) are the differences in returns between portfolios by market capitalization and book-**to**-market (value) ratios, and the relevant coefficients are firm-specific exposures **to** such risks (market, size, and value risk). 5 Discounted cashflow analysis derives s**to**ck valuations by estimating the stream of dividends accruing **to** shareholders over the entire future life-course of the company and discounting that stream of payments back **to** the present. Intrinsic value is equal **to** the discounted present value (DPV) of future dividends. Formally for discrete cash flows: ��� � �� ��� ; or for � ������ ��� continuous cash flows: ��� � � �����������. � 6 Formally, rational inves**to**rs initially value a company based on the DPV of its future dividend � � stream: ��� ����� while sentiment inves**to**rs value the same company: ��� �������; where δ represents inves**to**r sentiment and DPV1 is the correct discounted present value of future dividends at time=1. At time=2, new information is revealed and rational inves**to**rs correctly � update their price expectations: ��� ����������� ��� while sentiment inves**to**rs incorrectly � update their price expectations: ��� ����������� where ξ * is the expected change **to** future dividends revealed and ½ < θ < 1 represents the underweighting of such information by �� � � sentiment inves**to**rs. Demand for shares is: �� ��S�������� ������� where ������� and ψ is the risk **to**lerance fac**to**r for that type of inves**to**r (rational or sentiment). At low sentiment � � � levels [δ < z0 < 0 such that ��� ���� ���È��], sentiment inves**to**rs withdraw from the market � � and rational inves**to**rs determine prices: �� ���� ���È��. At high sentiment levels [δ > z1 > 0 44

� � � such that ��� ���� ���È��], rational inves**to**rs are driven from the market due **to** short-sale � � constraints and sentiment inves**to**rs determine pricing: �� ���� ���È��. At intermediate � � � � � sentiment levels [z0 < δ < z1 such that ��� ���È������ ���� ���È��], rational and sentiment inves**to**rs jointly determine price, which approximates a risk-**to**lerance weighted average of price expectations: �� ����È��� ��� � � � � � � ����� ��� È�� �� ����� ���È��� ����. 7 Formally, the first-day close price for the issuer’s shares fully incorporating sentiment � � inves**to**rs’s expectations is: �� ��� ����where �� is the rational predicted price and ��� is the intensity of noise trader sentiment at t=1 and is a random variable uniformly distributed on �������� so �����É���� ���� [integrating Baker and Stein’s formulation in footnote 6 **to** Derrien’s model, if δ < z0 then sentiment inves**to**rs withdraw from the market, ��� ��, and � �� ��� ; if δ > z0, P1 is strictly increasing with increasing δ]. The underwriters set the offer price POPR by maximizing fees earned against the cost of price support activities post-IPO. Total fees are the gross spread times the offer price: �����, where f is the gross spread. Cost of price support is: ������É� ���� � � ������ � � � � �� �� �� ��� �� � � ����� �� � ���� �� ��� �� � � � � ; � � underwriters maximize earnings by pricing the IPO offer price at: ���� ��� ������ (obtained � by solving ������ � � �� � ��� ��� �����). The numera**to**r for first-day returns is: ����� �� �� � � ���� ��� ����� ��� ���� � ��� � ������� ����������; as f is generally fixed at 0.07, inves**to**r sentiment should predict first-day returns (if δ > z0, Pfdr is strictly increasing with increasing δ). 8 Formally, the predicted price equals the actual price plus an uncorrelated disturbance term: � �� ��� ���. As ε is by definition uncorrelated with P * , the variance of predicted prices must equal the sum of the variances for observed prices and the disturbance term: � � �� � � � ���� ����; as variances cannot be lower than zero, the variance of predicted prices cannot be lower than the variance of observed prices: � � �� � � ����. Conversely, if the variance of predicted prices is lower � than that for observed prices, then �� ��� must be predictable. Since EMH asserts that predicted prices are the DPV of future dividends, the volatility of dividends should be greater than or equal **to** that of observed prices. Shiller demonstrates that is not the case (equivalently by showing that log dividend-price ratios are more variable than present value models), and that the excess volatility of s**to**ck prices directly implies predictability of long-run returns (LeRoy and Porter 1981; Shiller 1981, 1984; Campbell and Shiller 1987, 1988). 9 Formally, prospect theory hypothesizes that people assign gambles the value � �������, where ��� � if x ≥ 0 and � ������� � if x < 0; � � ���� �� ���� � � �; ���� � � �� 45 ����������� �� � ; and p* is the probability that the gamble will yield outcomes at least as good as x. A wide range of studies supports λ ≈ 2 (coefficient of loss aversion, a measure of relative sensitivity **to** gains and losses), violating SEU preference axioms since the sensitivity **to** gains and losses should be uniform. 10 One could justifiably ask why an investment bank must underwrite IPOs and price them in a two-stage bookbuilding process. While non-Bayesian inves**to**r models generally assert that underwriters are soliciting private price information from rational inves**to**rs, IPOs have been priced by auction methods or sold directly **to** public inves**to**rs in the United States and other countries, with a specialized investment bank, WR Hambrecht + Co, championing Dutch auction

- Page 1 and 2: Reconsidering Price: Institutional
- Page 3 and 4: economic action with social structu
- Page 5 and 6: the introduction of institutional l
- Page 7 and 8: elevant risks (Fama and French 1992
- Page 9 and 10: theorem (Odean 1998; Kaustia and Kn
- Page 11 and 12: instance, professional managers wit
- Page 13 and 14: As discussed earlier, IPO pricing i
- Page 15 and 16: alter the profit-maximization const
- Page 17 and 18: stages of development, including pu
- Page 19 and 20: perceptions of companies is not a d
- Page 21 and 22: vehicles to generate long-term shar
- Page 23 and 24: The explanatory variables are insti
- Page 25 and 26: For non-Bayesian investor models, I
- Page 27 and 28: the implied volatility of index fut
- Page 29 and 30: models, significant at p
- Page 31 and 32: Hence, the impact of institutional
- Page 33 and 34: longer post-IPO than Income investo
- Page 35 and 36: holding period, sales restrictions,
- Page 37 and 38: REFERENCES Aggarwal, Reena. 2000.
- Page 39 and 40: Ellis, Katrina, Roni Michaely, and
- Page 41 and 42: Ljungvist, Alexander, Vikram Nanda,
- Page 43: Weber, Max. [1918] 1958. “Science
- Page 47 and 48: those propaganda films about how ev
- Page 49 and 50: ! ! 1! Figure 1: Average First-day
- Page 51 and 52: ! ! 3! Table 1: Theoretical Import
- Page 53 and 54: ! ! 5! (0.185) (0.175) (0.179) (0.1
- Page 55 and 56: ! ! 7! Revenues (standardized) -1.8
- Page 57 and 58: ! ! 9! (3.149) (3.085) (2.856) (3.4
- Page 59 and 60: ! ! 11! Operating Cashflow (standar
- Page 61 and 62: ! ! 13! (0.436) (0.433) Positive Ea
- Page 63: ! ! 15! Table 9: Venture Capital-co