EMBRACING NEW INNOVATION MEANS EMBRACING THE UNKNOWN, ESPECIALLY FOR INVESTORS WHO TARGET EMERGING IPOS. DAVID DICKS, AN ASSISTANT PROFESSOR OF FINANCE, UNCOVERS INSIGHTS SITUATED AT THE CROSSROADS OF INNOVATION, RISK, AND INVESTOR BEHAVIOR.
So the mathematical model we're thinking about is things we don't know that we don't know…we have this new thing, and we don't really know if it's going to work out.
INVESTORS PREFER TO INVEST IN NEW IPOS IF THERE IS A DEGREE OF DIVERSIFICATION AMONG ASSETS WITH SIMILAR LEVELS OF UNCERTAINTY, MITIGATING RISKS TO A SINGLE INVESTMENT. THIS RESULTS IN HIGHER INVESTOR SENTIMENT. WHILE CORRESPONDING WAVES IN POSITIVE SENTIMENT HAVE BEEN MYSTERIOUS, THE STUDY'S MODEL HIGHLIGHTS HEDGING AS THE PIVOTAL FACTOR.
Baker and LER from Harvard had noticed that there are times that there's high investor sentiment, and everybody goes to the I P O then, and there's times that sentiment stinks and nobody goes to the I P O.”
We show that investor concerns about uncertainty, what they don't know, motivate entrepreneurs to time their financing decisions resulting in IPO waves and therefore the boom-and-bust cycle of innovation. We're saying the reason why sentiment is high is because there's a lot of opportunity to invest. So it's not that the sentiment is driving the investment opportunities, it's that the entrepreneurs strategically wait to finance their investment, and then we all go at once because it hedges the investor uncertainty. So we’re saying the reason why there is high sentiment is because there is a lot of new innovation.
THE BUSINESS REVIEW IS A PRODUCTION OF LIVINGSTON AND MCKAY AND THE HANKAMERSCHOOL OF BUSINESS AT BAYLOR UNIVERSITY
