Open Access Honors Program Thesis

First Advisor

Adam Smedema


Going public (Securities)--Psychological aspects; Investments--Psychological aspects;


Increasingly, finance researchers are including irrationality into their understanding of the stock market, including emotions (Tetlock, 2007) or misunderstanding of available information (Huberman & Regev, 2007). The popularity of the recent Alibaba IPO demonstrates that investors can get excited.1 Is excitement an important determinant of the behavior of stock market investors? Empirical evidence suggests that investors “herd” into similar stocks (Wermers, 1999) and may experience common feelings of optimism and pessimism (Tetlock, 2007). If investor’s emotions correlate, what about excitement? Can the excitement for a particular stock spill over into the excitement of other stocks?

To analyze the impact excitement may have on investor’s behavior, I analyze stock market returns around initial public offerings (IPOs). Much research has established three key features of stocks around their IPOs. First, the stock return on the IPO day is, on average, extremely positive. Second, the stock return of the IPO stock over a longer horizon tends to be lower than non-IPO stocks. Finally, higher first day stock returns are followed by higher trading volume. Taken together, Baker and Wurgler (2006) opine that these features may be the result of excitement for the IPO stock. Can this excitement spill over to other stocks as well? One important feature of IPOs is that for every IPO with excitement like Alibaba or Facebook, there are dozens of other IPOs that do not spur the same level of excitement. To empirically measure excitement, I use query volume reports from Google Trends ( Google Trends reports at a weekly granularity how often a search term is entered into the search engine. I argue that, on average, more queries means more excitement. Da, Engleberg, and Gao (2011) find evidence that supports this argument. Da et al. (2011) show that query volume from Google Trends for IPO stocks relate to higher first day IPO returns and lower subsequent returns. Baker and Wurgler (2006) relate this pattern (high first day returns and low subsequent returns) to excitement. Therefore, I argue that IPOs with high query volume have more excitement (that is, are “hyped”) than IPOs with low volume (which I called “obscure”).

My main hypothesis is not about the excitement surrounding individual stocks (this has been covered by Da, et al. (2011) previously), but rather how the excitement of an individual stock can spill over into the whole market. To measure the impact on other stocks, I analyze how excitement for an individual IPO stock relates to the entire stock market. My main empirical test is to relate the Google Trends query volume of IPO stocks to the return and trading volume of the S&P 500 stock market index.

To test the hypothesis, I performed a t-test of market returns, by grouping the weekly S&P 500 returns and volume by the total IPO hype (Google Trends Search Volume). I find that, on average, returns and trade volume of the S&P 500 are higher during the weeks with large IPO hype. This difference, though, is not statistically significant.

Date of Award



Department of Finance

University Honors Designation

A thesis submitted in partial fulfillment of the requirements for the designation University Honors

Date Original


Object Description

1 PDF file (21 pages)