LAUSR

ABSTRACT We study the impact of online buzz prior to internet firms’ Initial Public Offerings (IPOs) on market valuation of their common stock through the first two years. Using economics of information theories, cheap talk, and costly state falsification, we hypothesize that the quantity of buzz influences shareholder value. We find that high levels of buzz in the year prior to the offering are associated with higher company valuations at the IPO and for the following two years. Our findings suggest that online buzz serves as a costly state falsification signal that is not cheap talk; rather, it acts as a risk reducer for the underwriter and represents qualitative information about the issuer. This research adds to the IPO literature by empirically testing a new determinant of IPO value, online buzz. This information on the marketing and selling of stock, a financial instrument, also has implications for valuing other long-term assets.