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

Using word frequency analysis to define whether news articles are positive or negative, we measure media bias as the number of positive in excess of negative news articles in the pre-IPO period and empirically examine how media bias affects post-IPO market performance. Consistent with our hypothesis that media bias drives retail demand for IPOs, leading to a temporary deviation from fundamentals in post-IPO prices, we find robust evidence that media bias is positively related to IPO first-day returns while negatively related to long-run abnormal returns, even after controlling for the number of news articles. Further analysis reveals a negative relation between media bias and the rate of allocation among retail investors, and a positive relation between media bias and retail trading in the immediate aftermarket, indicating that media bias brings more retail investors both to the primary market and to the secondary market. Taken together, these findings suggest that media tone can influence post-IPO prices through the presence of investor sentiment around the IPO event.