The Variability of IPO Initial Returns
37 Pages Posted: 7 Jul 2006 Last revised: 13 Feb 2009
Date Written: November 18, 2008
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: Suggested Citation