Theory to Practice

Seasonal darkness and IPOs: a strange correlation

Is there a relationship between the shorter days with fewer hours of sunlight we have in the autumn and the level of underpricing we see on the first day of listing in IPOs? Thanks to our recent study based on a broad sample, we were able to come up with original insight that has compelling practical implications.

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.

The study

The timeframe for our study was 1 January 2006 to 31 December 2016, and our sample counted 3102 IPOs in 32 countries. We analyzed the possible relationship between a particular natural phenomenon that occurs in the autumn, namely fewer hours of sunlight per day, and the level of underpricing recorded on the first day of listing (also known as an IPO discount). By studying the impact of seasonal darkness on this discount, we attempted to offer an interpretation of the possible greater risk aversion that this entails.


Working on a broad global database and using multivariate regression, we were able to formulate a number of insightful deductions and generalize the more relevant conclusions that we obtained from our analysis.


Two main assumptions underpinned our research questions:

  1. Seasonal darkness leads to higher risk aversion, so investment activities (i.e. buying shares in an IPO) need incentives that take this into account (namely an IPO discount).
  2. Sensitivity to seasonal darkness generates asymmetrical effects that could lead to greater underpricing during autumn with respect to winter months when the days start getting longer again.


By using a multiple regression model to verify our two hypotheses, we were able to classify the different characteristics of issuers and offers.  What proved to be decisive in assessing our assumptions was a comparison of returns during the darkest months and the months when the hours of sunlight start increasing again.


Our findings highlight the positive impact of seasonal darkness on underpricing by companies that go public in the months with fewer hours of sunlight. In other words, during that time of the year, all other conditions being equal, the IPO discount is higher. The most likely interpretation of this phenomenon rests on what are essentially irrational reasons, which can be linked to behavioral finance. Instead, the fundamentals of the companies in question don’t seem to come into play. As we’ve said, seasonal darkness underpins a sort of higher risk aversion among investors. More specifically, the higher north we go, the most pronounced this phenomenon is, which underscores the sensitivity of the IPO discount to the number of hours of sunlight in the day.

Conclusions and takeaways

We can endorse the contention that the increase in risk aversion caused by seasonal darkness in the autumn and winter months must be offset by offering shares at reduced prices. But we can’t confirm the additional hypothesis that posits a possible asymmetric effect of seasonal darkness at the winter solstice (when days start getting longer).


By gathering empirical evidence on a specific market that is marked by uncertainty (in this case, the IPO market), companies that want to go public will be able to undertake this process with greater awareness and minimize the risk of failure or inefficiencies. As for future research, it would be useful to collect timely data on the incidence of seasonal darkness and the consequences on the population and to analyze the impact on other variables linked to the IPO market, such as price volatility immediately post-listing. In addition, researchers could broaden the analysis to include a study of a possible relationship between seasonal darkness and exercising the greenshoe option, expanding the size of the market offering.