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The Variability of IPO Initial Returns

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Author Info
Michelle Lowry
Micah S. Officer
G. William Schwert

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Abstract

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12295.

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Date of creation: Jun 2006
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Handle: RePEc:nbr:nberwo:12295

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Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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