The Variability of IPO Initial Returns
Michelle B. Lowry
Drexel University, Philadelphia, PA 19104
Micah S. Officer
Loyola Marymount University, Los Angeles, CA 90045
G. William Schwert
University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research
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 among firms whose value is more difficult to estimate, i.e., among
firms with higher information asymmetry. Our findings highlight underwriters'
difficulty in valuing companies characterized by high uncertainty, and, as
a result, raise serious questions about the efficacy of the traditional firm
commitment underwritten IPO process. One implication of our results is that
alternate mechanisms, such as auctions, may be beneficial, particularly for
firms that value price discovery over the auxiliary services provided by underwriters.
Key words: IPO, Underpricing, Cycles, Information Asymmetry, Conditional
JEL Classifications: G32, G24, G14
Cited 141 times in the SSCI and SCOPUS through 2019
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Last Updated on 5/17/2020