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IPO first-day returns: resilience to monetary policy shocks

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  • Khaled Alsabah

Abstract

Purpose - This research examines the relationship between monetary policy surprises and the first-day returns of Initial Public Offerings (IPOs). The primary objective is to determine whether unexpected changes in the federal funds rate around Federal Open Market Committee (FOMC) announcements impact IPO underpricing. Design/methodology/approach - Using a dataset of IPOs from 2000 to 2020, we leverage the time gap between IPO offer price declarations and FOMC announcements to assess the exogenous impact of monetary policy shocks on first-day IPO returns. Our approach differentiates between anticipated and unanticipated changes in the federal funds rate. Findings - The results reveal no significant effect of monetary policy surprises on first-day IPO returns, suggesting that IPO investors do not account for monetary policy shocks in their initial pricing decisions. This contrasts with established findings, which we replicate, regarding broader market reactions to FOMC announcements. Originality/value - This study is the first to examine the specific impact of monetary policy shocks on IPO underpricing, using the timing of IPO price declarations relative to FOMC announcements. This research offers new insights into the resilience of IPO pricing to external shocks, contributing to the broader understanding of underpricing within the behavioral finance framework.

Suggested Citation

  • Khaled Alsabah, 2025. "IPO first-day returns: resilience to monetary policy shocks," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 17(2), pages 365-382, March.
    • Handle: RePEc:eme:rbfpps:rbf-09-2024-0278
    DOI: 10.1108/RBF-09-2024-0278
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    More about this item

    Keywords

    IPO; Fed fund; Monetary policy; Equity market; Behavioral finance; E44; E52; G02; G24; G32;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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