Effect of Media Coverage on the First-day Returns of Initial Public Offerings

Abstract

The first-day high initial returns on initial public offerings have been of interest to academics for many years. This research proposes an explanation to this anomaly by assessing news coverage of IPOs on newspapers prior to the first day of trading in The Stock Exchange of Thailand and The Market of Alternative Investment. News coverage is measured by media coverage (area of news covered, number of news headlines, and number of newspaper heads) and the public relations value which reflects the news value and the efficiency of news presented. Results show that the space of articles published has a significant negative relation with the first-day returns of IPOs. Also, similar effect has been found on the public relations value. In other words, the amount and quality of information dissemination caused an abnormal low on first-day returns. We further find that the news coverage one to three days prior to the first trading day has a significant negative relation with first-day returns. The higher public relations value of popular newspapers and economic newspapers have a significant negative relation with lower first-day returns of IPOs. These findings support the explanations of IPOs anomaly conjectured that high initial returns are caused by the asymmetric information between issuers and investors of the IPOs. The amount of information published and the quality of information can reduce these information asymmetries, hence, reducing the initial returns.