Working Paper: NBER ID: w9858
Authors: Lubo 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: No keywords provided
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| declines in expected returns (G17) | IPO waves (G24) |
| increases in expected profitability (L21) | IPO waves (G24) |
| increases in prior uncertainty about average profitability (D89) | IPO waves (G24) |
| high market returns (G17) | IPO volume (G24) |
| low market returns (G19) | IPO volume (G24) |
| recent market returns (G17) | IPO volume (G24) |
| changes in aggregate profitability (E25) | IPO volume (G24) |
| analysts' forecasts of long-term earnings growth (G17) | IPO volume (G24) |
| recent changes in excess volatility (C58) | IPO volume (G24) |
| recent changes in valuation of newly listed firms (G24) | IPO volume (G24) |
| IPO volume (G24) | future market returns (G17) |
| IPO volume (G24) | recent changes in market return volatility (G17) |