Working Paper: NBER ID: w12295
Authors: Michelle Lowry; Micah S. Officer; G. William Schwert
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; Initial Returns; Volatility; Underpricing; Information Asymmetry
JEL Codes: G32; G24; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased information asymmetry (D82) | Higher IPO initial return volatility (G24) |
| Higher information asymmetry (D82) | Greater pricing errors by underwriters (G24) |
| Hot IPO markets (G24) | Increased average and volatility of IPO initial returns (G24) |
| Firm characteristics (L25) | Underwriter ability to price IPOs accurately (G24) |
| Underwriter ability to price IPOs accurately (G24) | IPO initial return volatility (G17) |