Premium
The Variability of IPO Initial Returns
Author(s) -
LOWRY MICHELLE,
OFFICER MICAH S.,
SCHWERT G. WILLIAM
Publication year - 2010
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2009.01540.x
Subject(s) - initial public offering , underwriting , volatility (finance) , common value auction , information asymmetry , business , enterprise value , price discovery , value (mathematics) , financial economics , monetary economics , economics , econometrics , actuarial science , accounting , finance , microeconomics , mathematics , statistics , futures contract
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 for firms that are more difficult to value because of higher information asymmetry. Our findings highlight underwriters’ difficulty in valuing companies characterized by high uncertainty, and raise serious questions about the efficacy of the traditional firm‐commitment IPO process. One implication of our results is that alternate mechanisms, such as auctions, could be beneficial for firms that value price discovery over the auxiliary services provided by underwriters.