The Economic Consequences of Social Unrest: Evidence from Initial Public Offerings
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Summary:
Prior research attributes negative stock market performance following episodes of social unrest to elevated uncertainty. However, social unrest does not solely increase uncertainty, but separately acts to decrease investor sentiment. To determine which effect dominates, we study initial public offering (IPO) underpricing, which responds differently to changes to uncertainty and investor sentiment. Consistent with the notion that social unrest dampens investor sentiment, we find robust evidence that IPO first-day returns are lower during times of greater social unrest. Limits to arbitrage intensify the negative relation between social unrest and underpricing. Notably, strong institutional frameworks mitigate the impact of social unrest on underpricing, suggesting that quality institutions weaken the link between investor sentiment and returns.
Series:
Working Paper No. 2023/232
Subject:
Financial markets Initial public offering Stock markets
Frequency:
regular
English
Publication Date:
November 10, 2023
ISBN/ISSN:
9798400258978/1018-5941
Stock No:
WPIEA2023232
Format:
Paper
Pages:
52
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