Articlebronze2010

The Variability of IPO Initial Returns

Michelle B. Lowry · Micah S. Officer · G. William Schwert

391 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Corporate Finance and Governance Financial Analysis and Corporate Governance

Abstract

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 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.

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References

1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1977Book Review: Time Series Analysis: Forecasting and Control 1991Conditional Heteroskedasticity in Asset Returns: A New Approach 1977Time Series Analysis: Forecasting and Control 1997Industry costs of equity 1987Expected stock returns and volatility 1991The Long-Run Performance of Initial Public Offerings 1989Why Does Stock Market Volatility Change Over Time?

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2007Do Investors Overweight Personal Experience? Evidence from IPO Subscriptions 2010Going public to acquire? The acquisition motive in IPOs 2014When do family firms have an advantage in transitioning economies? Toward a dynamic institution‐based view 2017Initial Public Offerings: A Synthesis of the Literature and Directions for Future Research 2011Initial Public Offerings as Lotteries: Skewness Preference and First-Day Returns 2019

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