The Federal Reserve Board eagle logo links to home page
Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Initial Public Offerings in Hot and Cold Markets
Jean Helwege and Nellie Liang
2003-4


Abstract: The literature on IPOs offers a wide variety of explanations to justify the dramatic swings in the volume of IPOs observed in the market. Many theories predict that hot IPO markets are characterized by clusters of firms in particular industries for which a technological innovation has occurred, suggesting that hot and cold market IPO firms will differ in quality, prospects, or types of business. Others suggest hot market IPOs are firms that take advantage of irrational investors. We compare firms that go public in a number of hot and cold markets during 1975- 2000, examining them at the time of the IPO and during the following five years. We find that both hot and cold market IPOs are largely concentrated in the same narrow set of industries and hot markets for many industries occur at the same time. We also find few distinctions in quality and scant evidence that hot market IPOs have better growth prospects. Our results suggest that technological innovations are not the primary determinant of hot markets because IPO markets cycle with greater frequency than the underlying innovations, and are more in line with the view that hot markets reflect greater investor optimism, though not necessarily active manipulation by managers.

Keywords: IPO, hot markets, firm performance, investor sentiment

Full paper (122 KB PDF)


Home | FEDS | List of 2003 FEDS papers
Accessibility
To comment on this site, please fill out our feedback form.
Last update: February 21, 2003