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Are Hot Markets Driven by Hot Resource Shares or Hot Commodities?

Author

Listed:
  • Jo-An Suchard

    (School of Banking and Finance, University of New South Wales, Sydney 2052.)

  • Li-Anne Woo

    (School of Business, Bond University, Gold Coast, QLD 4229.)

Abstract

Cycles in initial public offer (IPO) underpricing have been historically linked to both the proportion and pricing of resource-based IPOs issued relative to the entire population of IPOs. In addition, IPOs in the less diversified resource sector are exposed to changes in underlying commodity market prices which directly affect firm valuation. However, prior IPO research has largely ignored the various risk factors affecting resource firms. In this paper, we explicitly consider the explanatory power of ‘traditional’ IPO risk factors and augment these with specific risk characteristics associated with the resource sector, such as the underlying changes in resource commodity prices, the nature of activities (exploration versus production), and, the level of commodity diversification. IPO market cycles over the period March 1983 to January 1990 are identified using the switching regression technique of Goldfeld and Quandt (1972). The regression results suggest that for ‘hot’ markets, the level of underpricing is unrelated to any previously identified risk characteristics. Yet in ‘cool’ markets, both the underlying commodity price change, period of subscription, issue size and the proportion of resource to total listing are influential. Interestingly, the level of firm diversification and the nature of resource activity do not systematically affect the level of underpricing.

Suggested Citation

  • Jo-An Suchard & Li-Anne Woo, 2003. "Are Hot Markets Driven by Hot Resource Shares or Hot Commodities?," Australian Journal of Management, Australian School of Business, vol. 28(3), pages 319-344, December.
    • Handle: RePEc:sae:ausman:v:28:y:2003:i:3:p:319-344
    DOI: 10.1177/031289620302800306
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    References listed on IDEAS

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    1. Beatty, Randolph P. & Ritter, Jay R., 1986. "Investment banking, reputation, and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 213-232.
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    3. Ray Ball & Philip Brown, 1980. "Risk and Return from Equity Investments in the Australian Mining Industry: January 1958 — February 1979," Australian Journal of Management, Australian School of Business, vol. 5(1-2), pages 45-66, April.
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