Cash to Spend: IPO Wealth and House Prices

Abstract

This study empirically demonstrates the positive impact of initial public offerings (IPOs) on local housing prices in California from 1993 through 2017. In the spirit of the difference-in-difference approach, we test whether hedonic price indexes increase after IPO events more for the areas around IPO firm headquarters. We use the IPO events of public filing, issuing, and lockup expiration to distinguish changes in the shareholders’ expected wealth, assessed wealth, and immediately available wealth, respectively. HPIs increase more within 10 miles of IPO headquarters than in the surrounding area by 1.0% after filing and 0.8% after issuing but approximately zero after lock-up expiration. This result suggests that original shareholders change their housing demand when their wealth changes but not when liquidity constraint is relaxed. The impact is larger when the wealth increase by IPO is larger; e.g., higher offer price, larger IPO proceeds, and larger share underpricing at filing. The impact is also larger for younger and smaller firms.

Keywords: Initial Public Offerings, Housing Value, Hedonic Regression, Wealth Effects, Liquidity Constraints, Executive Compensation

JEL Classification: L26, M12, J33, R21