The FIFA World Cup Effect on the U.S. IPO Market

Transcription

1 The FIFA World Cup Effect on the U.S. IPO Market Sturla Fjesme, Jin Roc Lv, and Chander Shekhar * This version: August 21, 2019 Abstract Underpricing for U.S. IPOs issued during World Cup Periods (WCPs) is 9.7% lower than that outside WCPs. IPOs during WCPs experience lower post-ipo return volatility, pre-ipo price revision, and foreign investor participation but generate a higher long-run return. Sentiment and share prices are lower in the secondary market during WCPs. Issuers/underwriters recognize this effect and adjust offer prices in the primary market to incentivize investors to subscribe to new shares, but do not attempt to avoid listings during WCPs. Prices of shares issued during WCPs are more likely to be closer to intrinsic values than those issued during other periods. JEL Classification: F21, G14 Keywords: FIFA World Cup; Sport Sentiment; IPO; Underpricing * Fjesme, sturla.fjesme@oslomet.no, Oslo Metropolitan University, 0130 Oslo, Norway; Lv, jin.lv@anu.edu.au, Australian National University, Acton, ACT, 2601, Australia; Shekhar, c.shekhar@unimelb.edu.au, University of Melbourne, Parkville, VIC, 3010, Australia. We would like to thank Einar Bakke, John Bizjak, Fenella Carpena, François Derrien, Alex Edmans, Spencer Martin, Lyndon Moore, Øyvind Norli, Uday Rajan, Øystein Strøm, Garry Twite, and seminar participants at the FIRN 2018 Corporate Finance Research Meeting and Oslo Metropolitan University for their helpful comments and suggestions. 1

2 1. Introduction Studies of sport sentiment have documented the effect of Federation Internationale de Football Association (FIFA) World Cups on investor sentiment and financial markets (e.g., see Edmans et al., 2007; Kaplanski and Levy, 2010; Ehrmann and Jansen, 2016). During FIFA World Cup Periods (WCPs), the U.S. stock market exhibits negative abnormal returns due to lower market sentiment driven by non-u.s. investors (Kaplanski and Levy, 2010). However, World Cups can also affect the U.S. initial public offering (IPO) market in two different ways: sentiment reduction in the secondary market and demand reduction in the primary market. When World Cups reduce the sentiment in the secondary market (the sentiment reduction effect), the first-day closing price will be lower than otherwise, which in turn reduces IPO underpricing. On the other hand, World Cups may actually reduce the demand for shares that are scheduled to be to be issued in the primary market during the World Cup (the demand reduction effect), requiring that issuers/underwriters 1 increase underpricing to attract subscribers for their shares. We note that these two effects are not mutually exclusive and may indeed attenuate each other, or one may dominate the other. The primary goal of this paper therefore is to empirically examine the relation between changes in sentiment induced by the World Cup and IPO underpricing. We use a sample of 6,971 IPOs in the US market between to investigate the FIFA World Cup effect on the U.S. IPO market. Our empirical results suggest that the sentiment reduction effect is dominant relative to the demand reduction effect. IPOs whose issue dates are during (outside) WCPs exhibit an average underpricing of 8.7% (18.4%), and this difference in underpricing is significant both statistically and economically. Moreover, IPOs during WCPs are 1 In this paper we assume that the underwriter s interest is aligned with the issuer s interest. We acknowledge that potential agency problems may exist between issuers and underwriters. However, the consideration of agency problems between issuers and underwriters does not change our main arguments or results in this paper. 2

3 subject to significantly lower price revisions during the offer process, exhibit lower share price volatility after the shares start trading, and generate higher long-run returns. Taken together, these results demonstrate that both the market sentiment and the first-day closing price are lower during WCPs. Additionally, IPOs during WCPs have significantly lower foreign (non-u.s.) institutional shareholding, which is consistent with the notion that the sentiment reduction is driven by non- U.S. investors. 2 Moreover, we investigate whether issuers/underwriters attempt to avoid IPOs during WCPs. The presence of sentiment investors pushes the first-day closing price and even the offer price above the intrinsic value; thus, all issuers, underwriters, and regular customers of underwriters benefit from the presence of sentiment investors (Derrien, 2005; Cook et al., 2006; Ljungqvist et al., 2006). Once issuers/underwriters are aware of the lower sentiment during WCPs, they may attempt to avoid IPOs during these periods. As a result, the number of IPOs per month during WCPs would be lower than that outside WCPs. However, our results do not support this prediction as we find that the number of IPOs per month during WCPs is even slightly higher than that outside WCPs, although this difference is not statistically significant. Additional results suggest that issuers/underwriters do not attempt to avoid WCPs due to the lack of accuracy in the estimation of filing periods and the concerns over the waiting cost during filing periods. Our results on underpricing and number of IPOs per month suggest that the issues related to lower sentiment are resolved as follows. World Cups mainly affect the sentiment and share prices in the secondary market. Issuers/underwriters recognize this effect, assess the sentiment level in the secondary market and adjust offer prices in the primary market shortly before issue dates, but they do not 2 Due to data availability, we use the non-u.s. institutional shareholding as a proxy for all non-u.s. shareholding. DeVault et al. (2018) show that institutional investors change their investment behaviors with sentiment. If individual investors also change their investment behaviors with sentiment, the effect of FIFA World Cups on all non-u.s. investors in the U.S. IPO market will be greater than that on non-u.s. institutional investors only. 3

4 attempt to avoid issuing IPOs during WCPs. Subscribers in the primary market receive lower offer prices mainly due to the lower sentiment in the secondary market and possibly also due to the lower demand in the primary market. 3 We contribute to the literature in two important ways. First, we study the relation between sentiment and IPO underpricing. Previous studies such as Miller (1977), Derrien (2005), and Ljungqvist et al. (2006) have theoretically demonstrated the sentiment-driven component of underpricing; however, very few empirical studies have provided direct evidence of sentimentdriven underpricing. Results in Bradley (2001), Field and Hanka (2001), and Brav and Gompers (2003) provides indirect evidence by demonstrating the drop in share prices at the end of the IPO lockup period. We exploit the impact of World Cups on sentiment investors, which is arguably exogenous to the U.S. market, and provide direct evidence of sentiment-driven underpricing through the association between the reduction in investment sentiment and IPO underpricing during WCPs. Second, our results lend support to the association between behavioral biases and asset prices. Previous studies (e.g., see Saunders, 1993; Hirshleifer and Shumway, 2003; Kamstra et al., 2003; Cao and Wei, 2005; Kamstra et al., 2015) have documented the effects of weather and seasonality on asset prices through investor sentiment. We contribute to this literature by illustrating that when behavioral biases (specifically, optimism) are lower due to an exogenous event, newly issued stocks experience lower underpricing and higher long-run performance; hence, market prices are closer to the intrinsic values than otherwise. 3 Ideally, bookbuilding data can be used to identify the demand changes in the primary market. Due to data availability, we cannot completely rule out the possibility that the lower offer price during WCPs may be partially due to the lower demand in the primary market. 4

5 The remainder of this paper is organized as follows: Section 2 provides a brief literature review and builds our arguments; Section 3 explains the data; Section 4 presents empirical evidence of the FIFA World Cup effect on the U.S. IPO market; Section 5 discusses the empirical results on the attempts by issuers/underwriters to avoid IPOs during WCPs; and Section 6 concludes. 2. Related literature The literature on the association between behavioral biases and asset prices has expanded significantly in recent decades. 4 Previous studies have documented the effect of FIFA World Cups on investor sentiment and financial markets. Edmans et al. (2007) find that the elimination of a country from a FIFA World Cup tournament generates a significant negative effect on the local stock market in the same county. Moreover, Edmans et al. show that the World Cup sentiment effect is asymmetric markets in losing countries experience significant negative effects, but the effect on the markets of winning countries is insignificant. Ehrmann and Jansen (2017) find that market activity is reduced significantly in 15 countries during the 2010 and 2014 WCPs, especially when the national team is playing a match. This inattention - which is captured by fewer trades and lower trading volume - also (temporarily) affects price formation on the respective national markets. Beyond the local stock market, the negative effect of FIFA World Cups can even cross borders. Kaplanski and Levy (2010) document a negative abnormal return in the U.S. stock market during WCPs, even if football is not very popular in the U.S. Kaplanski and Levy argue that during 4 Barberis and Thaler (2003) and Barber and Odean (2013) have provided comprehensive lists of studies on behavioral finance. 5

6 WCPs, fans from all losing countries, which are mainly non-u.s. or European countries, induce an aggregate negative effect on investment sentiment and market returns in the U.S. market. We posit that the lower market sentiment in the U.S. market during WCPs also affects the IPO market in two different ways. First, and under the sentiment reduction effect, we assume that World Cups mainly affect a small group of investors in the secondary market. Asset valuations by a small group of investors are capable of moving the asset price significantly - Miller (1977) theoretically shows that a small group of optimistic investors can cause the price of an asset to deviate from (rise above) its intrinsic value. We argue that as long as valuations by a sufficiently enough optimistic non-u.s. investors (in the U.S. IPO market) are higher and farther away from the asset intrinsic value than those of the other investors, IPO underpricing during WCP may indeed be different than during non-world Cup periods. Valuations by these optimistic investors are likely to be more sensitive to the results of World Cup games and the effect could be twofold. When their beloved teams lose important games, these investors are likely to lower their valuations on newly issued shares in the secondary market. Additionally, these investors (and investors in general) may even shift their attention to World Cups, thus to the extent that they stop paying sufficient attention to the U.S. market and/or buying any newly issued shares. When World Cups reduce sentiment in the secondary market and hence the number of optimistic investors, the market price of newly issued shares will be lower, and hence IPO underpricing, which is typically measured as the percent difference between the offer price and the first-day closing price, will be lower. This line of reasoning lead us to suggest that all else equal IPO underpricing during WCPs is lower than that outside WCPs. 6

7 The demand reduction effect also relies on the observation that, in the U.S. market, asset valuations during WCPs are lower than those outside WCPs. However, demand reduction assumes that World Cups further reduce the number of investors in the primary market who subscribe to shares being issued. The reduction in the number of investors in the primary market has a twofold effect on IPO underpricing. First, based on the laws of demand and supply, when the number of investors in the primary market (and hence the demand for shares being issued) decreases, issuers/underwriters must increase underpricing to attract subscribers to these stocks. Second, demand reduction, which is mainly driven by uninformed investors, 5 leads to a larger proportion of informed investors in the primary market. As a result, issuers/underwriters must further increase underpricing to attract uninformed investors to participate in the IPO primary market (Rock, 1986). Underwriters may have additional motivation to attract uninformed investors to the market. Models in both Derrien (2006) and Ljungqvist et al. (2006) assume that in the presence of sentiment investors, investment banks employ IPO pricing strategies that are aimed towards benefitting their regular or institutional investors at the expense of the sentiment (optimistic) 6 investors. Such strategies would become more important in light of sentiment reduction associated with the World Cup. We suggest that in light of the two scenarios discussed above, it is reasonable to expect that the underwriters increase the level of underpricing in the primary market in order to attract sufficient number of uninformed investors that is, to increase demand in the primary market. 7 5 In theory, informed investors know the asset s intrinsic value, so their valuations of the asset do not change with their attention on or the results of World Cup games. Therefore, during WCPs, the demand from informed investors does not decrease. 6 We use terms sentiment and optimistic interchangeably throughout the paper. 7 Cook, Kieschnick, and Van Ness (2006) provide evidence that suggests that underwriters actively promote IPOs to sentiment investors. 7

8 We acknowledge that the sentiment and demand reduction effects (and their resulting association with IPO underpricing) are not mutually exclusive. If the higher underpricing in the primary market sufficiently mitigates the effect of lower participation (and underpricing) by investors in the secondary market, the resulting behavior of World Cup IPOs would be largely indistinguishable from that of companies that list outside the tournament period. We also recognize that any empirical analysis is likely to capture the resolution of the two effects. However, in as much as they are not exactly offset by each other, any difference in underpricing between WCP and non-wcp IPOs will provide evidence of sentiment s effect specifically on the pricing of newly listed stocks and more generally on asset prices. 3. Data 3.1. Sample selection We use the Thomson Financial Securities Data Company (SDC) new issues database to identify U.S. IPOs over the period We exclude closed-end funds, real estate investment trusts (REITs), American depository receipts (ADRs), unit offers, limited partnerships, and penny stocks (less than $5 offer prices). We also require that IPO companies have daily returns data available from the Center for Research in Security Prices (CRSP) and financial statement data available from Compustat. The final sample consists of 6,971 IPOs. We collect information on World Cup dates from the FIFA website. 8 8 See 8

9 Table 1 reports the number of IPOs from 1980 to The World Cup takes place every four years and lasts for approximately one month. We follow Kaplanski and Levy (2010) and consider WCPs to last from the day of the first game to the day after the last game. We define WCP = 1 if the issue date of an IPO is during a WCP. The dataset contains 179 IPOs (2.6% of the full sample) with issue dates during WCPs and 6,792 (97.4%) outside WCPs. For easier comparison, we split the sample into four-year groups (FIFA World Cup cycles), with one World Cup in each year group. --Table 1 here-- Underpricing is measured as the percent difference between the offer price and the firstday closing price. The number of IPOs during WCPs ranges from a low of 1 in 1982 to a high of 42 in As a proportion of all IPOs during a year group, the lowest value of 0.2% occurs during the 1982 World Cup, whereas the highest value of 5.6% is recorded for the 1986 World Cup. The data indicate that IPOs during WCPs are always less underpriced (on average) than the other IPOs in the same year group. Overall, the underpricing of IPOs during WCPs is, on average, 8.7%, which is less than half of that experienced by other IPOs outside WCPs Descriptive statistics Table 2 presents the descriptive statistics of the IPO characteristics. Columns 1 to 3 provide statistics for the full sample (All IPOs), columns 4 to 9 provide statistics for the two subsamples 9 Our sample starts from 1980 because before 1980, very few companies have issue dates during WCPs. Our sample ends in 2015 because we restrict the number of years in our sample to be a multiple of four, so that the ratio of World Cup years over the total number of years in our sample remains ¼. Controlling for this ratio, we have alternatively used different sample periods such as and to test our hypotheses, and all empirical results remain qualitatively similar. 9

10 (WCP = 0 and WCP = 1), and the last two columns provide the results for the tests of differences between IPOs during and outside WCPs. The variable definitions are in Appendix A. --Table 2 here-- We begin by examining the differences between the characteristics of the two subsamples of IPO companies at the time of listing. As the results in columns 10 and 11 indicate, there are no significant differences in Shares Offered, Proceeds, Gross Spread, Filing Period, 10 and Reputable Underwriter between the two subsamples of IPOs. For example, IPOs during WCPs offer, on average, approximately 35% of outstanding shares, whereas IPOs outside WCPs offer approximately 38%, and the difference between the two proportions is not significant at conventional levels. The mean gross spread which measures underwriter compensation is slightly less than the well-established level of 7% in both subsamples (Chen and Ritter, 2000). Although IPOs outside WCPs are slightly more likely than IPOs during WCPs 67% compared with 63% to be backed by reputable underwriters, the difference in this likelihood is insignificant. Based on previous studies (Purnanandam and Swaminathan, 2004; Johnson et al., 2015; Li et al., 2016), we calculate P/V Sale as the ratio of the midpoint of the initial filing price range over the fair price estimated based on sales. 11 The absence of any significant difference in P/V Sale between the two subsamples of IPOs indicates that issuers during WCPs do not set initial filing prices higher or lower than other issuers. In addition, we define Filing Period in a company as the number of 10 SDC provides data on the initial filing date and the initial filing price range of IPOs from To maintain the ratio of World Cup years over the total number of years at ¼, we construct the measures of Filing Period and Price Revision over the period of The number of observations with P/V Sale is only 4,170 because the construction of P/V Sale requires sale data in a company one year before its IPO. Previous studies (Purnanandam and Swaminathan, 2004; Johnson et al., 2015; Li et al., 2016) all experience significant reductions in the number of observations with P/V Sale. 10

11 days from the filing date to the issue date. We do not find a significant difference in Filing Period between IPOs during and outside WCPs, partially due to the large standard deviation of Filing Period. The large standard deviation and the insignificant difference in Filing Period are consistent with the notion that issuers/underwriters cannot accurately predict issue dates when they initially file IPO prospectuses. On the other hand, there are differences between the two subsamples of IPOs at the time of listing. Most notably, venture capital (VC)-backed IPOs are less likely to go public during WCPs, as are hi-tech IPOs. However, the significant differences between VC-Backed and High- Tech IPOs are mainly driven by the high-tech wave in 1999 and When we exclude IPOs in these two years, the differences in both VC-Backed and High-Tech IPOs become insignificant. In Table 2, there are significant differences between the two subsamples of IPOs in the measures that are associated with investment sentiment in the secondary market. IPOs during WCPs exhibit significantly lower underpricing. Due to the reduction in investor sentiment during WCPs, the return Volatility is lower in IPOs during WCPs than those outside WCPs. When issuers/underwriters detect this lower investment sentiment, the offer price Revision is lower in IPOs during WCPs than those outside WCPs. Finally, IPOs during WCPs outperform those outside WCPs in the long run, as evidenced by the higher average three-year BHAR. 12 In Table 2, we report the results based on the three-year BHAR only. Nevertheless, when we use other measures for IPO long-run performance, such as two- or four-year BHARs or wealth relatives, 13 all empirical results remain qualitatively similar. In addition, both Foreign Holding (%) and Foreign 12 To maintain the ratio of World Cup years over the total number of years at ¼, we construct the three-year BHAR over the period of Previous studies that use the measure of wealth relative include Ritter (1991), Brav and Gompers (1997), Crutchley et al. (2002), and Chen et al. (2012). 11

12 Inst. Participation (a dummy variable) 14 are lower for IPOs during WCPs, which is consistent with the notion that the participation of non-u.s. shareholders in the U.S. IPO market is diminished when their sentiment is lower during WCPs. Taken together, these comparisons indicate that IPOs during WCPs are quite similar to those outside WCPs. However, the univariate comparisons also highlight significant differences that arise between the two subsamples of IPOs during the IPO process, and these differences are generally consistent with the notion that World Cups mainly affect the sentiment in the secondary market. 4. World Cup effect In this section, we first test the two propositions developed in Section 2 by exploring the relation between WCPs and IPO underpricing. Then, we examine the differences in return volatility, price revision, and the long-run BHAR of IPOs during and outside WCPs to provide additional evidence for the sentiment reduction effect. In addition, we investigate the change in non-u.s. investor participation in the U.S. IPO market to reveal the channel of sentiment reduction IPO underpricing According to our propositions, IPOs during WCPs could exhibit either lower or higher underpricing than those outside WCPs. We now examine the relation between WCP and underpricing in various multivariate settings that allow us to simultaneously control for other variables that have been shown to be related to underpricing. The variable of interest is WCP, a 14 Thomson Reuters 13f provides data on the country of institutions (U.S. or not) from To maintain the ratio of World Cup years over the total number of years at ¼, we construct the measures of Foreign Holding (%) and Foreign Inst. Participation over the period of

13 dummy variable that equals one if the issue date falls during WCPs, and the results are reported in Table 3. --Table 3 here-- Column 1 in Table 3 contains the most basic specification that simultaneously controls for the characteristics of the IPO companies. The coefficient of WCP is negative and statistically significant, suggesting that after controlling for other firm-specific variables, IPOs during WCPs exhibit 6.79% lower underpricing than those outside WCPs. The coefficients for the other control variables are significant and consistent with the prior literature (e.g., see Aggarwal et al., 2002; Ljungqvist and Wilhelm, 2003; Yung and Zender, 2010; Liu and Ritter, 2011; Karpoff et al., 2013) and with expectations Shares Offered is negatively related to underpricing, whereas Log(Proceed), MB, Gross Spread, VC Backed, and High Tech exhibit positive and statistically significant relationships with the dependent variable. In column 2, we additionally include industry and year dummy variables. The results in column 2 remain qualitatively similar, indicating that they are not driven by either particular industries or time periods in our sample. Our results are consistent with the notion that the reduction in investment sentiment during WCPs is associated with lower underpricing. In World Cup years (WCYs), investment sentiment gradually decreases as the World Cup approaches and recovers after the World Cup is finished. If the change in sentiment is the reason for the change in underpricing, then we expect to observe that underpricing gradually decreases as the World Cup approaches and recovers after the World Cup is finished. In column 3, we employ a more restrictive specification by including dummy variables that control for the month of issue dates in WCYs. The results in column 3 indicate that the negative relation between the World Cup and underpricing is evident for only WCY May, WCY 13

14 June, WCY July, and WCY August these are the World Cup months and the months that immediately precede and succeed a World Cup. The largest reductions in Underpricing during June and July are consistent with the notion that investment sentiment gradually decreases as the World Cup approaches and recovers after the World Cup is finished. During our sample period of , all World Cups have been held during the summer period in the Northern Hemisphere. Kamstra et al. (2003) document that the number of hours from sunset to sunrise has an effect on market returns. It is therefore possible that the relation between Underpricing and WCP is a weather (sunlight) effect but not a sport sentiment effect. We investigate this possibility in column 4, where we include a dummy variable that takes the value of one for IPOs in June and July. The results indicate that underpricing is still significantly lower during WCPs even after controlling for a potential June and July effect. In column 5, we regress Underpricing on World Cup for the subsample of IPOs that go public during the calendar months of June, July, and August (summer months in the Northern Hemisphere). This restriction reduces the sample to 2,013 IPOs. The coefficient of WCP on Underpricing continues to be negative and statistically significant, and the coefficients of all other control variables remain qualitatively similar to the previous specifications. The result in column 5 indicates that among all companies that go public during summers, IPOs during WCPs experience 3.96% lower underpricing than the IPOs outside WCPs. Although the coefficient of WCP decreases from columns 1 and 2 to column 5, it is still significantly negative in column 5. Therefore, we conclude that the relation between WCP and Underpricing is not only a weather effect but also a sport sentiment effect. Ritter (1984) documents that IPOs often take place in waves of high and low underpricing. One could argue that our results on the negative relation between WCP and Underpricing in columns 1-5 are purely driven by high waves of underpricing in some non-world Cup years. For 14

15 example, IPOs in 1999 and 2000 experience abnormally high underpricing on average due to the technology bubble (Ljungqvist and Wilhelm, 2003; Ofek and Richardson, 2003). In column 6, we estimate the regression in a subsample that excludes IPOs in these two years, and the coefficients of WCP remain significantly negative. Therefore, the lower underpricing of IPOs during WCPs is not driven only by the high wave of underpricing due to the technology bubble. During , IPOs during WCPs constitute only 2.6% of our full sample of IPOs. It is possible that our results on the negative relation between WCP and Underpricing in columns 1-6 are mainly driven by the unbalanced comparison between the two subsamples of IPOs during and outside WCPs. Therefore, we used propensity score matching (PSM) to perform a matched sample analysis, and we present the regression results in column 7. First, we use all dependent variables except WCP in column 2 to compute a propensity score for each IPO. Second, we match each IPO during WCPs with an IPO outside WCPs. The PSM reduces our sample to 358 IPOs. 15 Then, we run regressions using the matched sample of 358 IPOs. Due to the significant reduction in the sample size, the regression coefficients in column 7 are generally less significant than those in column 2. However, the coefficients of WCP remain significantly negative. 16 Therefore, the lower underpricing of IPOs during WCPs is not driven by the unbalanced comparison between the two subsamples of IPOs during and outside WCPs. 15 In robustness tests we have experimented with different sets of independent variables to compute the propensity score and matched each IPOs during WCPs with two or three IPOs outside WCPs. The results remain qualitatively similar to those reported in column In robustness tests, we have regressed Volatility, Revision, BHAR, and Foreign Holding against WCP using the matched sample of 358 IPOs. All regressions results remain qualitatively similar to those reported in Tables

16 4.2. Return volatility We use the difference in post-ipo return volatility between IPOs during and outside WCPs as indirect evidence for the sentiment reduction effect. The presence of sentiment investors increases return volatility, as such investors are uncertain about asset prices and change their asset valuations with sentiment and over time. In Table 4, we test whether the volatility is lower in IPOs during WCPs. --Table 4 here-- Column 1 uses the full sample of IPOs, while column 2 uses the subsample of IPOs that go public during summer months. The dependent variable is Volatility, which is the standard deviation of returns over the first 60 days following the IPO. Despite the differences in the sample size, columns 1 and 2 both produce very similar empirical results and identify a negative relation between WCP and Volatility. For example, column 1 shows that the volatility of IPOs during WCPs is 26.9% lower than that of IPOs outside WCPs. In addition, Reputable Underwriter, VCbacked, and High Tech exhibit a positive relation with volatility, which is consistent with the results in Wang and Yung (2011). Our main result is consistent with the notion that the lower participation of sentiment investors leads to lower volatility in the companies that go public during WCPs Price revision We use price revision to provide evidence for the effect of sentiment from the perspective of underwriters. Underwriters revise the offer price upward when they observe increased investment sentiment just before the IPO (Hanley, 1993; Bradley and Jordan, 2002; Loughran and Ritter, 2002; 16

17 Lowry and Schwert, 2004). Therefore, during WCPs, the lower price revision for IPOs indicates lower sentiment in the U.S. market. In Table 5, we test whether the pre-ipo price revision is lower in IPOs during WCPs. --Table 5 here-- Column 1 uses the full sample of IPOs, while column 2 uses the subsample of IPOs during summers. The dependent variable, Price revision, is the percent change from the midpoint of the initial filing price range to the offer price. Column 1 shows that Price revision in IPOs during WCPs is 5.08% lower than their counterparts outside WCPs. The negative relation between WCP and Price Revision supports our argument that investment sentiment is lower in IPOs during WCPs. Column 2 includes only companies that go public during the summer months, and the significantly negative coefficient of WCP again suggests that even among companies that go public during summer, the ones that do so during WCPs are subject to lower price revisions. In Table 5, along with results presented in Table 3, the negative relation between WCP and Price Revision and the negative relation between WCP and Underpricing imply a positive relation between Underpricing and Price Revision. The positive relation between Underpricing and Price Revision is consistent with the partial adjustment phenomenon, which was initially documented in Hanley (1993) and has been investigated by many following studies (e.g., see Lowry and Schwert, 2004; Edelen and Kadlec, 2005; Cornelli et al., 2006; Hoberg, 2007) Long-run BHAR We use the difference in the long-run BHAR of the two subsamples of IPOs during and outside WCPs to provide additional evidence for the existence of sentiment investors from the perspective 17

18 of the evolution of information asymmetry. Based on Miller (1977), previous studies on IPOs (e.g., see Ritter and Welch, 2002; Derrien, 2005; Ljungqvist et al., 2006) use investment sentiment to explain the dual puzzles of short-run underpricing and long-run underperformance. At the time of the IPO, sentiment investors push the share price higher than its intrinsic value, which leads to short-run underpricing. After a company goes public and as information asymmetry decreases, the share price moves closer to its intrinsic value, which results in long-run underperformance. As a result, if the reduction in investment sentiment is the reason for lower underpricing in IPOs during WCPs, then we expect to observe higher long-run BHAR for this group of IPOs. In Table 6, we test whether the BHAR is indeed higher in IPOs during WCPs. --Table 6 here-- Column 1 uses the full sample of IPOs, while column 2 uses the subsample of IPOs during the summer months. The dependent variable, BHAR, is adjusted against the CRSP value-weighted market return. Columns 1 and 2 both produce very similar empirical results and identify a positive relation between WCP and BHAR. For example, column 1 shows that the BHAR of IPOs during WCPs is 23.6% higher than that of IPOs outside WCPs. Moreover, MB and Reputable Underwriter have significantly positive coefficients, while VC Backed has a significantly negative coefficient. The results are consistent with the notion that the reduction in investment sentiment results in a smaller deviation of the IPO offer price above its intrinsic value in IPOs during WCPs and that the long-run return in these IPOs are not as poor as that in IPOs outside WCPs. 18

19 4.5. Participation of non-u.s. investors We contend that during WCPs, lower investment sentiment leads to lower underpricing. We follow Kaplanski and Levy (2010) and argue that the reduction in sentiment during WCPs is mainly driven by non-u.s. investors. Due to data availability, we use the non-u.s. institutional shareholding as a proxy for all non-u.s. shareholding. DeVault et al. (2018) show that institutional investors change their investment behaviors with sentiment. If we can identify lower shareholding by non-u.s. institutions in IPOs during WCPs, and assuming that individual investors also change their investment behavior with sentiment, the effect of World Cups on all non-u.s. investors in the U.S. IPO market will be greater than that of non-u.s. institutional investors only Table 7 here-- In, we test whether the participation of non-u.s. investors is indeed lower during WCPs. In Columns 1-3, we regress Foreign Inst. Participation on WCP and controls in a standard Probit model. Foreign Inst. Participation is a dummy variable equal to one if the IPO has a foreign institutional shareholder based on the 13F filings. Column 1 shows a negative relation between WCP and Foreign Inst. Participation. In column 2, we additionally include industry and year dummy variables. The results in column 2 remain qualitatively similar, indicating that they are not driven by particular industries or time periods in our sample. Institutions report their holdings at the end of a quarter (March, June, September, and December), while companies go public in all months. The longer the time between the IPO issue date and its next quarter end is, the more inaccurate the estimation of foreign intuitional shareholdings (which is used to proxy for all foreign 17 This statement is valid regardless of whether institutional investors or individual investors are more likely to change their valuations and investment behaviors with sentiment. 19

20 shareholdings) at the end of the first trading day, as institutional/individual investors have had more opportunities to trade shares in the secondary market. To account for the potential effect of this inaccuracy, we additionally control for First Month in a Quarter and Second Month in a Quarter, which are dummies equal to one when companies go public in the first and second month of a quarter. Moreover, in column 3, we investigate only IPOs in the third month of a quarter, which potentially limits the inaccuracy associated with ownership on first listing day, but also significantly reduces the sample size; however, the results remain qualitatively similar. Columns 4-5 present the estimates of the ordinary least squares (OLS) regressions. The dependent variable is Foreign Holding, which is the shareholdings by foreign institutions in the percentage of all institutional holdings. Column 4 uses the full sample, while column 5 uses a subsample of IPOs whose issue dates are in the third month of a quarter to control for the change in the accuracy of our proxy with the IPO issue date. The results indicate that Foreign Holding during WCPs is 0.67% lower than that outside WCPs; this result is economically significant considering that the average Foreign Holding for IPOs in our sample is 3.4%. 18 Therefore, columns 1-5 all provide evidence for the lower participation of non-u.s. investors in the U.S. IPO market during WCPs than outside WCPs Attempts to avoid WCPs In this section, we begin with a test on the number of IPOs per month and provide initial evidence that issuers/underwriters do not attempt to avoid IPOs during WCPs. Then, we test the differences 18 Foreign Holding is 3.4% of outstanding institutional ownership. The average IPO issues only 35% of outstanding shares. This means that foreign investors buy a sizable fraction of IPO issued shares even if they own only 3.4% of outstanding institutional shares (assuming they do not buy shares pre-ipo). 19 The number of observations with participation is larger than the number of observations with holdings, because not all IPOs have institutional shareholders. After controlling for the industry and year dummies, the number of observations with participation decreases, as in some years in some industries, no IPOs have foreign participation. 20

21 in the initial filing price and the filing period during and outside WCPs to explain the absence of attempts by issuers/underwriters to avoid WCPs Number of IPOs per month We have established that World Cups reduce investment sentiment during WCPs. Given that WCP dates are well known in advance, the issuers and underwriters could simply avoid IPOs during WCPs and thus not be subject to any sentiment effects. In light of results that suggest that all issuers, underwriters, and regular customers of underwriters benefit from the presence of sentiment investors (Derrien, 2005; Cook et al., 2006; Ljungqvist et al., 2006), issuers/underwriters have significant incentives to avoid IPOs during WCPs altogether. If issuers/underwriters attempt to avoid IPOs during WCPs, then we would expect the number of IPOs per month during WCPs to be lower than that outside WCPs. Our empirical results, however, are inconsistent with the idea that there are fewer IPOs per month during WCPs. First, Table 1 provides initial evidence that the number of IPOs per month during WCPs is not lower than that outside WCPs. In Table 1, the average percentage of IPOs during WCPs in a four-year FIFA World Cup cycle is 2.6%, while the percentage of WCPs in a four-year cycle is approximately 2.1% (= 1/48 months). We use a z-test to compare these two percentages and obtain a p-value of Although we do not find a significant difference between these two percentages, the slightly larger percentage of IPOs during WCPs than the percentage of a WCP in a four-year cycle indicates that the number of IPOs per month during WCPs is at least not lower than that outside WCPs. Second, we run regressions with the number of IPOs in a calendar month as a dependent variable. Table 8 presents the estimates from three OLS regressions. The dependent variable is the 21

22 Number IPOs per month. World Cup Month is a dummy that is equal to one for the months of June and July in World Cup years. Lag(Market Return), Lag(Number of IPOs), and Lag(Underpricing) are the CRSP value-weighted market return, the number of IPOs, and the average underpricing for all IPOs in the previous calendar month, respectively. In all three regressions, the coefficient of World Cup Month is positive but not significant. Therefore, the results in both Table 1 and Table 8 are inconsistent with the notion that issuers/underwriters attempt to avoid IPOs during WCPs. --Table 8 here Why do issuers/underwriters not attempt to avoid WCPs We have provided initial evidence that issuers/underwriters do not attempt to avoid IPOs during WCPs. We now further explore the reasons for the absence of issuers/underwriters attempts to avoid WCPs. One possible reason is that issuers/underwriters are unable to accurately estimate the filing period, which is the number of days from the filing date to the issue date. If they could, then the midpoint of the initial filing price range would reasonably be expected to be lower for IPOs during WCPs than for IPOs outside WCPs. If companies believe that they may be subject to the effects of lower sentiment during WCPs but decide to proceed with the IPOs, they would likely lower their expectation regarding offer prices and, relatedly, the initial filing prices. To test for differences in the midpoint of the initial filing price range during and outside WCPs, we base our approach on previous studies (Purnanandam and Swaminathan, 2004; Hoberg, 2007; Johnson et al., 2015; Li et al., 2016) and use Equation (1) to measure the midpoint of the initial filing price range: P/ V Sales = Midpoint in Filing Price Range (P/ Sales) Match Sales in the Prior Year of IPOs Shares Outstanding (1) 22

23 where (P/ Sales) Match is the price multiple in the matched sample. We break down each Fama French industry into three portfolios based on size and use the median price multiple in each portfolio as the price multiple in the matched sample. P/V Sale is the ratio of the midpoint of the initial filing price range to the fair price estimated based on sales. The lower the P/V Sale is, the lower the initial filing price that an issuer sets. A second possible reason that issuers/underwriters do not attempt to avoid WCPs is the waiting cost. The waiting time during the filing period is costly for IPO companies; thus, companies usually go public as soon as they meet all the requirements from the U.S. Securities and Exchange Commission (SEC). Faced with listing during WCPs, companies may decide to postpone their IPOs until after the World Cup only if they evaluate that the cost associated with sentiment reduction is higher than the cost associated with waiting. Companies that avoid WCPs can therefore find themselves faced with higher waiting times, and as a result the filing period for IPOs that list during WCPs would expected to be shorter than those that list outside these periods. In Table 2, we do not find a significant difference in P/V Sale or Filing Period between the two subsamples of IPOs during and outside WCPs. In this section, we further employ various specifications to regress P/V Sale or Filing Period against WCP plus additional control variables and find that the coefficient of WCP is always statistically insignificant. 20 These empirical results are consistent with the notions that issuers/underwriters cannot accurately estimate filing periods and are concerned with the waiting cost during filing periods. The lack of accuracy in the estimation of filing periods and the concern over the waiting cost provide additional evidence that issuers/underwriters do not attempt to avoid IPOs during WCPs. 20 These results are not tabulated but are available upon request. 23

24 6. Conclusions We propose two scenarios that outline the effect of the FIFA World Cup on the U.S. IPO market. The sentiment reduction effect implies that compared to IPOs outside WCPs, the underpricing of IPOs during WCPs should be lower, whereas the demand reduction effect suggests the opposite. We note that these effects need not be mutually exclusive and may indeed nullify each other. Our empirical results suggest that that the sentiment reduction effect dominates the demand reduction effect. IPO underpricing is 9.7% lower during WCPs than outside of WCPs. Moreover, we document that WCP is negatively associated with post-ipo return volatility and pre-ipo price revision but positively associated with the long-run BHAR, which provides additional evidence for the sentiment reduction effect. In addition, we find that IPOs during WCPs have significantly lower foreign (non-u.s.) institutional shareholding, which is consistent with the notion that this sentiment reduction is driven by non-u.s. investors. Second, we do not find empirical support for the notion that issuers/underwriters attempt to avoid IPOs during WCPs due to the reduced investment sentiment at that time. The number of IPOs per month during WCPs is even greater than that outside of WCPs, although the difference between the two is not statistically significant. We further explore the reasons why issuers/underwriters do not attempt to avoid WCPs. Two possible reasons are the lack of accuracy in the estimation of filing periods and the concern over the waiting cost during filing periods. Taken together, we contend that the FIFA World Cup Effect on the U.S. IPO market leads to issuers/underwriters making adjustments to the offerings as follows. World Cups mainly affect the sentiment and share prices in the secondary market. Issuers/underwriters assess the sentiment level in the secondary market and adjust offer prices in the primary market shortly before issue dates, but they do not attempt to avoid to issue IPOs during WCPs. Subscribers in the primary 24

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