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Initial Public Offerings in Hot and Cold Markets

Published online by Cambridge University Press:  06 April 2009

Jean Helwege  and
Nellie Liang
Jean Helwege
Affiliation:
[email protected], Department of Finance, University of Arizona, Tucson, AZ 85721;
Nellie Liang
Affiliation:
[email protected], Board of Governors of the Federal Reserve System, Division of Research and Statistics, Capital Markets Section, Mail Stop 89, Washington, DC 20551.
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Abstract

The literature offers many explanations for why the IPO market cycles from hot to cold. These include theories in which hot markets represent clusters of IPOs in a new industry, and signaling models that predict that hot markets draw in better quality firms. Others suggest hot market IPOs' stock returns reflect their poor quality. We compare IPOs over cycles during 1975–2000 and find that hot and cold IPO markets do not differ so much in the characteristics of the firms that go public as in the quantity of firms that go public. Both hot and cold IPOs are largely concentrated in the same narrow set of industries and they have few distinctions in profits, age, or growth potential. Our results suggest that hot markets are not driven primarily by changes in adverse selection costs, managerial opportunism, or technological innovations, but more likely reflect greater investor optimism.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 3 , September 2004 , pp. 541 - 569
Copyright
Copyright © School of Business Administration, University of Washington 2004

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