The Variability of IPO Initial Returns
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.
We are indebted to Jay Ritter for the use of his data. We received valuable comments from Campbell Harvey (the editor), Harry DeAngelo, Craig Dunbar, Robert Engle, Laura Field, Ravi Jagannathan, Jay Ritter, Ann Sherman, Ivo Welch, Donghang Zhang, Jerry Zimmerman, and two anonymous referees. We also received valuable comments from the participants in seminars at Boston College, Indiana University, New York University, Penn State University, the University of Arizona, the University of Rochester, the University of Southern California, the University of Toronto, and the University of Western Ontario, and from participants at the Duke-UNC Corporate Finance Conference and at the Harvard Business School Entrepreneurship, Venture Capital and Initial Public Offerings Conference. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Michelle Lowry & Micah S. Officer & G. William Schwert, 2010. "The Variability of IPO Initial Returns," Journal of Finance, American Finance Association, vol. 65(2), pages 425-465, 04. citation courtesy of