The Variability of IPO Initial Returns

54 Pages Posted: 16 Jun 2006 Last revised: 7 Aug 2010

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: June 2006

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.

Suggested Citation

Officer, Micah S. and Lowry, Michelle B. and Schwert, G. William, The Variability of IPO Initial Returns (June 2006). NBER Working Paper No. w12295. Available at SSRN: https://ssrn.com/abstract=908534

Micah S. Officer

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

Los Angeles, CA 90045
United States

Michelle B. Lowry

Drexel University ( email )

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

G. William Schwert (Contact Author)

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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