Seasonal Affective Disorder and IPO underpricing: implications for young firms

Abstract

A critical event in the life of a firm is when it undergoes an initial public offering (IPO). Drawing on the Seasonal Affective Disorder (SAD) literature, which evidences a psychological condition that produces heightened pessimism and risk aversion during the fall and winter months, this study focuses on understanding the potential implications of SAD for young firms. Our results confirm the influence of SAD on IPO underpricing and demonstrate that younger firms experience even higher underpricing during periods most heavily associated with SAD. However, we find that using a higher-quality underwriter or changing the share retention decision can mitigate this impact.

Keywords::

• IPOs
• Seasonal Affective Disorder (SAD)
• underpricing
• share overhang

Notes

^1. For completeness, we also examine an alternative specification for SAD, where SAD = (H_t − 12) for the entire year rather than just during the fall and winter. The results are qualitatively unchanged. Following Kamstra et al. (2012) we also examine an alternative variable called Incidence, which is the proportion of SAD sufferers who are afflicted during each month. Our results are robust to this specification as well.

^2. Note that we examine the natural log of Size and Age to mitigate the influence of extreme values.

^3. Some prior studies find an asymmetric effect in fall and winter. We explore this possibility but find no significant difference in our results. Thus, for clarity, we avoid reporting this specification.