Keywords: Initial public offerings, stock price underperformance, asymmetric information
Abstract: Asymmetric information models characterize hot IPO markets as
periods when better quality firms have an incentive to issue equity, and
cold markets when the lemons premium associated with equity is too high to
draw in many issuers. Recent empirical evidence, however, suggests that
firms that issue in hot markets are a major source of stock price
underperformance of equity issuers. We investigate these opposing views
with data on IPO firms that issued in 1983, a hot market, and 1988, a cold
market. We find that the two sets of firms have similar operating
performance, but stock returns are worse for firms that went public in the
hot market. Our results are largely consistent with investor overoptimism
in hot markets, but not with the asymmetric information models.
Full paper (3151 KB PDF)
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