The Variability of IPO Initial Returns

37 Pages Posted: 7 Jul 2006 Last revised: 13 Feb 2009

Micah S. Officer

Loyola Marymount University - Department of Finance and Computer Information Systems

Michelle Lowry

Drexel University

G. William Schwert

University of Rochester - Simon Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 18, 2008

Abstract

The monthly volatility of IPO initial returns is substantial, fluctuates dramatically over time, and is considerably larger during "hot" IPO markets. Consistent with IPO theory, the volatility of initial returns is higher among firms whose value is more difficult to estimate, i.e., among firms with higher information asymmetry. Our findings highlight underwriters' difficulty in valuing companies characterized by high uncertainty, and, as a result, raise serious questions about the efficacy of the traditional firm commitment underwritten IPO process. One implication of our results is that alternate mechanisms, such as auctions, may be beneficial, particularly for firms that value price discovery over the auxiliary services provided by underwriters.

Keywords: IPO, Underpricing, Cycles, Information Asymmetry, Conditional Heteroskedasticity, Volatility

JEL Classification: G32, G24, G14

Suggested Citation

Officer, Micah S. and Lowry, Michelle and Schwert, G. William, The Variability of IPO Initial Returns (November 18, 2008). Simon School Working Paper No. FR 06-06; forthcoming, Journal of Finance. Available at SSRN: https://ssrn.com/abstract=904683 or http://dx.doi.org/10.2139/ssrn.904683

Micah S. Officer

Loyola Marymount University - Department of Finance and Computer Information Systems ( email )

Los Angeles, CA 90045
United States

Michelle B. Lowry (Contact Author)

Drexel University ( email )

Philadelphia, PA 19104
United States
215-895-6070 (Phone)

G. William Schwert

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-110L
Rochester, NY 14627
United States
585-275-2470 (Phone)
585-461-5475 (Fax)

HOME PAGE: http://schwert.ssb.rochester.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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