Clustering Patterns in Initial Public Offerings
54 Pages Posted: 27 Mar 2002
Date Written: October 2001
I develop a model of the IPO timing decisions of firms in an industry. The outcome of an IPO makes public previously private information, reducing the degree of asymmetric information among investors. This leads other firms in the industry to go public, even though they do not have immediate financing needs. The main result of the paper is that the offer prices of early IPOs predict the subsequent IPO volume. Investors with favorable information tend to indicate weak interest in the early offerings, so that their signals remain private and provide further profits in the anticipated wave of IPOs. The tendency to conceal favorable signals creates an asymmetry in the information content of the offer prices of early IPOs. High prices obtain only when information is favorable, but low prices need not imply unfavorable information, as investors with high signals may have strategically indicated weak demand. As a result, high prices reduce the subsequent informational asymmetry to a greater extent than low prices do, triggering more firms to go public.
Keywords: IPO clustering, hot markets, IPO timing
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