UT Haslam Faculty Finds Not All Press Is Good Press for IPO Performance

During an initial public offering (IPO), a company gives investors the chance to buy shares for the very first time. It’s a major step that transforms a company from a private entity into a public one, attracting new capital and a broader audience. Companies naturally seek positive press coverage during this time, hoping to attract investors with as much favorable media attention as possible. It turns out, however, there is a sweet spot for positive media sentiment — too much hype leads to weaker IPO performance. That is the finding of a new study, co-researched by Codou Samba, assistant professor with the University of Tennessee, Knoxville, Haslam College of Business’ Department of Management and Entrepreneurship.

More Is Not Always Better

Samba and her co-researchers — including Justin Yan (Ph.D., ’20) and former Haslam faculty member Rhonda Reger — examined how positive media sentiment affects the stock performance of newly listed U.S. companies. They defined positive media sentiment as an overall positive tone in media coverage. To conduct their research, the team analyzed 1,041 U.S. firms that were newly listed between 2010 and 2018. They focused on independent IPOs using the Securities Data Company Platinum’s Global New Issues Segment database to collect the data.

The researchers found an inverted-U relationship — some positive media coverage helps IPO performance, but too much praise can weaken IPO it. “IPO performance goes up with positive media sentiment at first, but after a certain point, IPO performance starts to drop with increasing positive media sentiment,” Samba says. “This shows that while some positive media attention is good, too much can backfire by bringing more scrutiny and making investors more skeptical.”

The researchers’ findings differ from earlier research, explains Samba. “Previous research usually found that positive media sentiment leads to better IPO performance,” she says. “Our study challenged that idea by showing a curvilinear relationship, where too much positive media attention has negative effects on IPO performance.”

Samba and her fellow researchers also found that IPO market conditions affect how investors react to positive media sentiment. “The impact of media sentiment depends on whether the IPO market is booming (hot) or slow (cold),” she explains. “In hot markets, positive media sentiment doesn’t have as much influence, but in cold markets, too much positive media sentiment can backfire even more.” This is because in hot markets, investors focus more on general market trends and less on the media, which makes the inverted U-shape less noticeable. In cold markets, investors pay closer attention to the media, making the negative impact of too much positive sentiment stronger.

What Causes the Change in Perception?

The researchers believe their findings come down to dual processing theory. “Basically, people have two modes of thinking,” Samba says. “One is quick and gut-driven (type one), and the other is slower and more analytical (type two).” When media sentiment is moderately positive, investors go with their instincts and see the IPO in a good light. If the hype gets too intense, however, they start thinking more critically, which can make them skeptical and cautious.”

The study also touches upon how excessive positive media attention can turn a company into a celebrity firm. Just like celebrities who take bold or risky actions to stay in the spotlight, these firms may exhibit unstable behavior that makes investors nervous.

Practical Implications

The findings from the researchers have real-world implications. “Investors should be wary of IPOs that get too much positive media attention,” Samba says. “Our study shows that these firms might face extra scrutiny, which can lead to poor market performance or lower returns on investments.”

To improve IPO performance, Samba suggests managing media attention effectively, building trust with investors and staying grounded. “This research could encourage media outlets to offer a more balanced coverage of IPOs, as well as push IPO firms to be more strategic with their public relations,” she says. “Instead of hyping up the IPO to grab investors’ attention, firms could focus on managing media sentiment in a more strategic way.”

“Too Much of a Good Thing: Addressing the Shape of Relationship Between Positive Media Sentiment and IPO Performance,” by Justin Yan, Lei Xu, Rhonda K. Reger and Codou Samba was accepted for publication by Long Range Planning.

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Leah McAmis, senior editor, leah@utk.edu

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Haslam College of Business - UT Haslam Faculty Finds Not All Press Is Good Press for IPO Performance