If you’re in the Northern hemisphere, Saturday December 21st is the winter solstice, the shortest day of the year. It’s news good for pagans, but it’s bad news for equity capital markets bankers. A large proportion of equity capital markets (ECM) bankers probably ought to go into hibernation from mid-October.
A new report on Seasonal Affective Disorder (SAD) and IPO under-pricing from academics at Butler University, Indianapolis, sheds light on previous research showing that initial public offerings (IPOs) don’t do as well during winter months when daylight hours are short.
Investors are the problem. SAD is directly linked to the number of hours of daylight, and when daylight hours are reduced, investors become subdued and depressed and are generally less keen to take risks. Bankers end up under-pricing IPOs to counteract this.
The university researchers looked at 4,525 shares issues, of which 2,146 took place during the SAD period from mid-September to mid-March. They found that IPO under-pricing was noticeably higher during this time, but that it was only really a problem for the riskiest and less proven firms- perversely, established firms experienced less under-pricing during SAD periods, possibly as a result of investors’ flight to quality.
The researchers also found that the effects of SAD on IPO pricing were reduced when risky firms going to market employed ‘higher quality underwriters.’
Had it read the research, maybe Twitter would have scheduled its IPO for June instead of November. The company’s share price rose 73% on the opening day and remains more than 70% above the $26 IPO price.