Working Paper: CEPR ID: DP4002
Authors: Lubos Pstor; Pietro Veronesi
Abstract: We develop a model of stock valuation and optimal IPO timing when investment opportunities are time-varying. IPO waves in our model are caused by declines in expected returns, increases in expected profitability, or increases in prior uncertainty about average profitability. The model predicts that IPO waves are preceded by high market returns, followed by low market returns, and accompanied by high stock prices. These as well as other predictions are supported empirically. Stock prices at the peak of the recent ?bubble?, which was associated with an IPO wave, are consistent with plausible parameter values in our rational valuation model.
Keywords: IPO; Stock Prices; Market Returns
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| recent market returns (G17) | IPO volume (G24) |
| expected returns (G17) | IPO volume (G24) |
| IPO volume (G24) | future market returns (G17) |
| aggregate profitability (E10) | IPO volume (G24) |
| analysts' forecasts (G17) | IPO volume (G24) |
| excess volatility (G17) | IPO volume (G24) |
| valuation of newly listed firms (G24) | IPO volume (G24) |
| prior uncertainty (D81) | IPO volume (G24) |