When the weather outside is frightful, an initial public offering's pricing is anything but delightful.
Plenty of things affect the pricing of a new stock issue: a company's fundamentals, corporate management's interests, feedback from bankers and overall market sentiment. But there's something else that factors into how a stock trades in its first days of trading: the weather.
Behavioral economists have long posited that emotions are highly involved in making financial decisions. If an investor is in a good mood, he's likely to be more risk seeking, and markets will go up. Conversely, if an investor is in a foul mood, she might be risk averse, and markets will go down. But the question is: How do you measure investor moods in aggregate?
A person's mood might be a response to the environment, and that includes the weather. It's an assumption that a recent study tested. The researchers hypothesized that sunshine could positively affect an investor, and in aggregate, move a stock price higher. Conversely, a cloudy day could negatively affect an investor's mood, and collectively, drag a stock price lower.
In particular, the researchers tested whether Seasonal Affective Disorder, or SAD, had an impact on price performance. SAD is a type of depression induced by changes in weather and seasons. People with SAD feel more lethargic during fall and winter months when there is less daylight. Researchers used various proxies for SAD such as the duration of daylight known as photoperiodism. They measured these proxies against market returns over almost 30 years and found varied results.
They examined at 1,304 IPOs that occurred between 1981 and 1989, and found that SAD negatively affected the price performance of an IPO in its first day of trading. That is, bad weather induced lower returns. Or as the researchers put it, "The psychological mechanism is that the changes in the photoperiod lead to changes in the mood of the investor or issuer, which, in turn, leads to changes in asset prices." The negative relationship also generally held up from 1999-2000, during the dot-com market bubble, in which 220 IPOs were studied, and in which there was an average underpricing of more than 100%.