An Initial Public Offering (IPO) is the moment when a company can raise the capital it needs to make strategic investments. Resorting to the financial markets is a move that comes with costs and risks, but it can give a company the necessary resources for long-term sustainability and growth. One particularly critical risk in the IPO process is linked to underpricing, which means that the amount of money raised is normally less than the objective value of the company being listed. A number of phenomena can impact the level of underpricing, such as an imbalance between supply and demand, or a discount given to investors with respect to the share price of similar listed firms. Even behavioral factors can play a part, and these are precisely the focus of our recent study.
How do the shorter days we experience in autumn affect our activities and our moods? A sizeable number of psychological and medical studies have explored the implications of this natural phenomenon (including economic aspects). Our study in contrast adopts a financial perspective to find out whether there is a link between seasonal darkness, the natural result of the Earth revolving around the Sun, and the level of underpricing in IPOs at different latitudes. We chose not to consider the well-known condition called Seasonal Affective Disorder (SAD) because that would involve taking a medical viewpoint, compiling a different data sample, and answering a different research question.
The extensive literature on underpricing follows two main research streams: investigations on the topic in a strict sense, and explorations of behavioral aspects of financial decisions. Our study, which takes this second direction, focuses primarily on the viewpoint of the issuer.
The hypothesis of an efficient market does not allow for environmental or climate-related variables to explain stock returns or market volatility. Yet there are several theories that tie into financial behavior which assert that certain climate conditions can impact investment decisions to some extent.
Behavioral finance theories investigate the characteristics of irrational investors (sometimes also called “noise traders”), who make their decisions based on emotions. Another research stream we look at that focuses on psychological factors reveals that the decisions that people make, to include investment decisions, are driven in part by their mood. In this context, certain environmental conditions affect investors’ moods (climate, season, social aspects). What’s more, emotions that play a part in the decision-making process can be influenced by temporary factors such as climate. The “mood non-attribution” phenomenon specifically impacts particularly complex decisions characterized by some degree of risk and uncertainty. We can draw connections between this phenomenon and any number of factors, including the weather. And finally, there are relevant studies that demonstrate how a negative attitude attenuates the demand for risky assets, while when people are in a positive mood they do more buying and trading on the market, even taking on securities with tangible risk.