This paper examines the effect of managerial overconfidence on the high initial return and poor long-run performance of IPOs. We find a positive relation between managerial overconfidence and initial return, implying that overconfident managers tend to signal the quality of their talent and firm by higher underpricing due to their overestimation of personal capabilities and firms’ prospects. However, the investors’ demand for the IPOs reduces the requirement of overconfident managers’ signaling IPOs quality through underpricing. Finally, managerial overconfidence is negatively related to the IPOs long-run performance because of the adverse impact of managerial overconfidence in the long run.
