The Role of Transitory Shocks in Equity Financing: Evidence from IPOs

56 Pages Posted: 17 Dec 2011 Last revised: 23 Jun 2021

See all articles by Daniel Sungyeon Kim

Daniel Sungyeon Kim

Chung-Ang University - College of Business & Economics

Sungbin Sohn

Peking University - HSBC Business School

Date Written: August 24, 2020

Abstract

Building on the idea that transitory shocks should not have long-run effects on dividends and prices, we use cointegration techniques to decompose stock market shocks into permanent and transitory shocks. We present a simple model that demonstrates the distinctive effects of transitory shocks on managers’ decision on going public and the degree of ownership dilution, and test the model predictions. We find that IPO volume increases after stronger transitory shocks. Firms that go public after stronger transitory shocks underperform more severely on average, but are more likely to be delisted for both good and bad reasons, implying that they are ex ante riskier, not worse, firms. We also find that during the book-building period, issuers tend to increase ownership dilution after transitory shocks. The findings suggest that issuers can effectively distinguish transitory stock market shocks from permanent ones and make strategic decisions to maximize their own interests in response to each type of shock.

Keywords: Permanent-transitory decomposition, initial public offerings, long-run performance

JEL Classification: G02, G12, G32

Suggested Citation

Kim, Daniel Sungyeon and Sohn, Sungbin, The Role of Transitory Shocks in Equity Financing: Evidence from IPOs (August 24, 2020). Available at SSRN: https://ssrn.com/abstract=1973172 or http://dx.doi.org/10.2139/ssrn.1973172

Daniel Sungyeon Kim

Chung-Ang University - College of Business & Economics ( email )

84 Heuk-suk Ro
Seoul
Korea, Republic of (South Korea)

Sungbin Sohn (Contact Author)

Peking University - HSBC Business School ( email )

University Town
Nanshan District
Shenzhen, Guang Dong 518055
China
+86-755-26035324 (Phone)
+86-755-26035344 (Fax)

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