Good IPOs draw in bad: Inelastic banking capacity and hot markets
AbstractWe posit that screening IPOs requires specialized labor which, in the short run, is in fixed supply.� Hence, a sudden increase in demand for IPO financing increases the compensation of IPO screening labor.� Increased compensation results in reduced screening which encourages sub-marginal firms to enter the IPO market, further increasing the demand for screening labor and thus its compensation.� The model's conclusions are consistent with empirical findings of increased underpricing during hot markets, positive correlation between issue volume and underpricing, negative correlation between issue volume and information production, and with tipping points between hot and cold markets characterized by discontinuous jumps in volume, underpricing, and issue quality.� Finally, the model makes sharp and so far untested predictions relating IPO market conditions both to the fundamental values of IPO firms and to the returns to investment banks and investment banking labor.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2008fe10.
Date of creation: 01 Jan 2008
Date of revision:
IPO; Underpricing; Labor Constraint;
Find related papers by JEL classification:
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
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- Chemmanur, Thomas J. & He, Jie, 2011.
"IPO waves, product market competition, and the going public decision: Theory and evidence,"
Journal of Financial Economics,
Elsevier, vol. 101(2), pages 382-412, August.
- Thomas J. Chemmanur & Jie He, 2012. "IPO Waves, Product Market Competition, and the Going Public Decision: Theory and Evidence," Working Papers 12-07, Center for Economic Studies, U.S. Census Bureau.
- Hertzel, Michael G. & Huson, Mark R. & Parrino, Robert, 2012. "Public market staging: The timing of capital infusions in newly public firms," Journal of Financial Economics, Elsevier, vol. 106(1), pages 72-90.
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