The Efficient IPO Market Hypothesis: Theory and Evidence

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

63 Pages Posted: 27 Jan 2019 Last revised: 25 Jun 2019

See all articles by Kevin R. James

Kevin R. James

London School of Economics & Political Science (LSE) - Systemic Risk Centre

Marcela Valenzuela

University of Chile

Date Written: January 10, 2019

Abstract

We derive the optimal underwriting method and the quantitative IPO pricing rule that this method implies in a market with informational frictions consisting of fully rational banks, issuers, and investors. In an efficient IPO market, an issuer’s expected initial return will be determined entirely by the combination of this pricing rule and issuer fundamentals. Applying this rule, we find that we can explain the quantitative magnitude of the principal aspects of the time-series and cross-sectional variation in IPO average initial returns. We conclude that the IPO market is efficient.

Keywords: Initial Public Offerings, Underwriters, IPO Underpricing, Efficient Markets Hypothesis

JEL Classification: G24

Suggested Citation

James, Kevin Roger and Valenzuela, Marcela, The Efficient IPO Market Hypothesis: Theory and Evidence (January 10, 2019). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=3313430 or http://dx.doi.org/10.2139/ssrn.3313430

Kevin Roger James (Contact Author)

London School of Economics & Political Science (LSE) - Systemic Risk Centre ( email )

Houghton St
London
United Kingdom

Marcela Valenzuela

University of Chile ( email )

Pío Nono Nº1, Providencia
Santiago, R. Metropolitana 7520421
Chile

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