Individual Investor Sentiment and IPO Stock Returns: Evidence from the Korean Stock Market

This paper examines the impact of individual investors' premarket and aftermarket sentiment on initial public offering (IPO) stock returns, based on 382 IPO firms in the Korean stock market from 2007 to 2014. The results reveal that individual investors' premarket sentiment is significantly and positively related to the initial returns, as measured by the difference between the offer price and the first-day opening price. The findings also show that individual investors' premarket sentiment is positively associated with their aftermarket sentiment, implying a spillover effect from premarket to aftermarket sentiment. However, after high initial returns in IPO firms with individual investors' high premarket sentiment, we find subsequent underperformance; this is more pronounced in firms with high premarket and aftermarket sentiment. Overall, our results imply that individual investors' premarket sentiment can largely explain IPO stock returns. Additionally, premarket sentiment followed by aftermarket sentiment can account for IPO stocks' underperformance. Nevertheless, the impact of individual investor sentiment on IPO stock returns seems to be a short-term phenomenon, as high initial returns and subsequent underperformance are more evident within the first month after the IPO.