Does the Tesla IPO offer a Test of the "Winner's Curse"?
Leading newspapers continue to discuss the Tesla IPO. During this time of bad stock market news, the market is celebrating the higher than expected Tesla stock price.
I just traded emails with a very smart Univ. of Minnesota economist who wondered whether Tesla's stock dynamics reflect diverse beliefs such that the most optimistic people concerning Tesla's future profits are most likely to buy the stock. In this case, will Tesla's new shareholders suffer from the Winner's Curse . If this wise economist is right, then do any hedge funds such as my old friend Eric Mindich of Eton Park make their money shorting stocks that just held an IPO?
Some finance nerd must have calculated what the rate of return would be on a portfolio that simply shorted IPO stocks. Now, I realize that there are time limits to how long you can sell short for. Are they binding in this case?
So what is the intuition here? In a diverse world, some of us are very high on Tesla's future while some are not. For the optimists, do they have "inside information" about the product's true quality? In this case, the optimists know that this company is truly about to boom but this isn't common knowledge. In this case, then shorting would not be a wise financial strategy.
But, if there is no issue of inside information then the average expectation of the stock's rate of return will be a more accurate estimate of the "truth" then what the most optimistic people (who will be the first ones to bid and will keep bidding even as the price goes up). When the "truth" about Tesla is revealed, will the optimists regret their early buy?
Now, there have been many IPOs recently (remember Google's?). What is interesting here is that this is a "green company". Are there environmentalist "cheerleaders" who will buy these shares for non-financial returns reasons -- i.e because they want to do the "right thing". In this case, the shorters appear to be even more likely to make money because the green investors are willing to lose $ to do the right thing and thus are less likely to engage in the due dillegence and research to investigate whether this "green company" truly has a bright future.
I just traded emails with a very smart Univ. of Minnesota economist who wondered whether Tesla's stock dynamics reflect diverse beliefs such that the most optimistic people concerning Tesla's future profits are most likely to buy the stock. In this case, will Tesla's new shareholders suffer from the Winner's Curse . If this wise economist is right, then do any hedge funds such as my old friend Eric Mindich of Eton Park make their money shorting stocks that just held an IPO?
Some finance nerd must have calculated what the rate of return would be on a portfolio that simply shorted IPO stocks. Now, I realize that there are time limits to how long you can sell short for. Are they binding in this case?
So what is the intuition here? In a diverse world, some of us are very high on Tesla's future while some are not. For the optimists, do they have "inside information" about the product's true quality? In this case, the optimists know that this company is truly about to boom but this isn't common knowledge. In this case, then shorting would not be a wise financial strategy.
But, if there is no issue of inside information then the average expectation of the stock's rate of return will be a more accurate estimate of the "truth" then what the most optimistic people (who will be the first ones to bid and will keep bidding even as the price goes up). When the "truth" about Tesla is revealed, will the optimists regret their early buy?
Now, there have been many IPOs recently (remember Google's?). What is interesting here is that this is a "green company". Are there environmentalist "cheerleaders" who will buy these shares for non-financial returns reasons -- i.e because they want to do the "right thing". In this case, the shorters appear to be even more likely to make money because the green investors are willing to lose $ to do the right thing and thus are less likely to engage in the due dillegence and research to investigate whether this "green company" truly has a bright future.
posted by Matthew E. Kahn at 9:48 AM
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