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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2008fe10.
Date of creation: 2008
Date of revision:
IPO; underpricing; labor constraint;
Other versions of this item:
- Naveen Khanna & Thomas H. Noe & Ramana Sonti, 2008. "Good IPOs Draw in Bad: Inelastic Banking Capacity and Hot Markets," Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 1873-1906, September.
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Thomas J. Chemmanur & Jie He, 2012.
"IPO Waves, Product Market Competition, and the Going Public Decision: Theory and Evidence,"
12-07, Center for Economic Studies, U.S. Census Bureau.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maxine Collett).
If references are entirely missing, you can add them using this form.