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
Date Written: January 10, 2019
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: Suggested Citation