The Incremental Value Relevance of Firm Specific Risk Measures in Pricing Junk IPOs
Posted: 10 Aug 2008 Last revised: 4 Jan 2019
Date Written: 2006
This is the first published study, to our best best knowledge, to look at the junk IPOs in a systematic manner using a quasi-experimental design. The study abandons the notion of homogeneous market for IPOs, and instead focuses on the differential demand for information across identifiable segments of the IPO market in the pre-market offering period leading to the first day closing prices.
We found that firm-specific risk measures are associated with the initial trading day return for IPOs managed by low reputation underwriters, and not for those managed by high reputation underwriters. However, as expected, these risk measures are impounded in initial trading day returns only for a sub-sample of high-risk junk IPOs that were marked down in price by the underwriters prior to the offering in order to make them more attractive to investors.
Our findings suggest that ex-ante risk measures are useful in picking among junk IPOs those with the best chances of survival, and thus earning an initial trading day return on those IPOs.
Keywords: Junk IPOs, Risk, Underwriter reputation, Segmentation, First day closing price, Political Economy
JEL Classification: C1, G1, G2, G3, L61, M1, M4
Suggested Citation: Suggested Citation