Articlegreen2011

IPO First-Day Return and Ex Ante Equity Premium

19 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Risk and Volatility Modeling

Abstract

Abstract This paper proposes a measure of ex ante equity premium, IPOFDR, which is the average difference between the initial public offering (IPO) offer price and the 1st-trading-day close price. I test the idea in 3 ways. First, there is a positive relation between IPOFDR and future market returns. Second, changes in IPOFDR help explain the cross section of stock returns. Third, the predictive power of IPOFDR for stock returns reflects mainly its close relation with market variance and average idiosyncratic variance—arguably measures of systematic risk. These results cast doubt on the notion that the IPO 1st-day return is a measure of investor sentiment.

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References

1973Risk, Return, and Equilibrium: Empirical Tests 1993On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks 1996Multifactor Explanations of Asset Pricing Anomalies 1973An Intertemporal Capital Asset Pricing Model 2006Investor Sentiment and the Cross‐Section of Stock Returns 1995The Limits of Arbitrage 1999By Force of Habit: A Consumption‐Based Explanation of Aggregate Stock Market Behavior 2000Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles

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