Regime Switches in Valuation Uncertainty Risk within IPO Markets: Implications for Intertemporal Variations in the Determination of IPO Underpricing

Abstract

Let IPO volume simply be denoted `volume'. This study finds low and high volume regimes within stock markets are, respectively characterized by low or high valuation uncertainty risk, with outcome underpricing is higher yet more disparate in context of high volume regimes. This finding questions the received assumption that clustering of IPOs implies improvements to similarity of IPO listings, that is, demonstrates heterogeneity of IPO quality increases with IPO volume. Given average underpricing increases with severity of valuation uncertainty risk, intertemporally and consistent with expectations, risk is positively correlated with returns. While market returns decrease with severity of valuation uncertainty risk, given valuation uncertainty risk typically is induced by more recent listings, market returns cannot be construed to be good proxies for valuation uncertainty risk. Simultaneously, initial returns to IPOs always are good proxies for severity of valuation uncertainty risk. Totality of study findings demonstrate that absent accounting for contemporaneous differences between prices of risk for IPOs, and prices of risk for previously listed stocks, comparisons of performance of IPOs and previously listed stocks lack robustness.

Keywords: Initial Returns, Underpricing, IPO Volume, Market Returns, Market Skewness, Valuation Uncertainty Risk, Market Volatility

JEL Classification: G11