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IPO First-Day Return and Ex Ante Equity Premium

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  • Guo, Hui

Abstract

This paper proposes a measure of ex ante equity premium, IPOFDR, which is the average difference between the initial public offering (IPO) offer price and the 1st-trading-day close price. I test the idea in 3 ways. First, there is a positive relation between IPOFDR and future market returns. Second, changes in IPOFDR help explain the cross section of stock returns. Third, the predictive power of IPOFDR for stock returns reflects mainly its close relation with market variance and average idiosyncratic variance—arguably measures of systematic risk. These results cast doubt on the notion that the IPO 1st-day return is a measure of investor sentiment.

Suggested Citation

  • Guo, Hui, 2011. "IPO First-Day Return and Ex Ante Equity Premium," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(03), pages 871-905, June.
  • Handle: RePEc:cup:jfinqa:v:46:y:2011:i:03:p:871-905_00
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    Cited by:

    1. Liu, Jia & Lister, Roger & Pang, Dong, 2013. "Corporate evolution following initial public offerings in China: A life-course approach," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 1-20.

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