Has the 1987 crash changed the psyche of the stock market? The evidence from initial public offerings

Purpose - The purpose of this paper is to utilize the initial public offerings (IPO) market to research the effect the stock market crash of 1987 had on the market psyche. Design/methodology/approach - The paper compares the number of IPOs, as well as accounting data during the years surrounding the 1987 crash to determine if there is a change in financial quality. The underwriting fee structure, underpricing and short term price changes during one year prior to and one year following the 1987 crash are examined, as well as the long term returns surrounding the crash. Findings - The stock market crash of 1987 did change the market psyche in the short to medium term. Results show greater risk aversion in the post crash period, as evidenced by fewer IPOs from riskier firms. Pricing is found to be more rational - less one day run-up, less upward adjustment from offering range, and less likely to be overpriced in intermediate and longer terms. Originality/value - The paper demonstrates the importance of market sentiment and may illuminate the causes of market cycles.