The Variability of IPO Initial Returns

Michelle B. Lowry

Penn State University, University Park, PA 16082

Micah S. Officer

University of Southern California, Los Angeles, CA 90089

G. William Schwert

University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research

First Draft: May 2006
Current Draft: November 2008

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 Heteroskedasticity, Volatility

JEL Classifications: G32, G24, G14

© Copyright 2006-2008, Michelle Lowry, Micah S. Officer, and G. William Schwert
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Last Updated on 11/18/2008