Determinants of Negative First-Day IPO Returns

Abstract

This paper outlines the phenomenon of negative first-day IPO returns. Using a comprehensive sample of firms that listed in the USA between 2000 and 2020, we find that 21.61% of all IPO firms have negative first-day returns, making this a common feature of US IPO markets. We identify key determinants that influence the likelihood of negative first-day IPO returns. A higher offer price, a higher deal size and belonging to the high-tech sector significantly decrease the probability of IPO overpricing. In addition, a higher proportion of over-allotment shares significantly decreases negative first-day IPO returns. We cannot find statistical evidence in favor of market timing ideas or importance of agency issues on the IPO overpricing phenomenon. Our results remain stable and qualitatively similar after robustness checks.

Keywords: Initial Public Offering, Negative First-Day IPO Returns, Probit

JEL Classification: G14; G24; G32