G02 - Behavioral Finance: Underlying PrinciplesReturn

This paper attempts to develop a theoretical framework that builds on heterogeneous beliefs to explain the financial anomalies related to IPO stocks. In particular, we develop a dynamic analysis framework to study the valuation of IPO price and the short-term probability of falling below IPO price based on perspectives of investors' heterogeneous priors and gradual information flow. Our study shows that the valuation of IPO price increases as the degree of heterogeneity due to investors' heterogeneous priors increases. Moreover, the short-term probability of falling below IPO price increases as the degree of investors' cognitive biases caused by gradual information flow increases.

I document a new channel that can be used by managers who can take advantage of investors preference for logo colours to influence their perception of the financial reports and thus indirectly affect firm value. Evidence suggests that firms having warm colours as a major logo colour, fewer colours used in the logo, and recognizable elements in the logo are associated with lower earnings management and higher firm value. My findings remain stable across different robustness checks.