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The Efficient IPO Market Hypothesis: Theory and Evidence

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  • James, Kevin R.
  • Valenzuela, Marcela

Abstract

We derive the optimal underwriting method and the quantitative initial public offering (IPO) pricing rule that this method implies in a market with informational frictions consisting of fully rational banks, issuers, and investors. In an efficient IPO market, an issuer’s expected initial return will be determined entirely by the combination of this pricing rule and issuer fundamentals. Applying this rule, we find that we can explain the quantitative magnitude of the principal aspects of the time-series and cross-sectional variation in IPO average initial returns. We conclude that the IPO market is efficient.

Suggested Citation

  • James, Kevin R. & Valenzuela, Marcela, 2020. "The Efficient IPO Market Hypothesis: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(7), pages 2304-2333, November.
    • Handle: RePEc:cup:jfinqa:v:55:y:2020:i:7:p:2304-2333_8
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    Cited by:

    1. Bianco, Simone & Zach, Florian J. & Liu, Anyu, 2022. "Early and late-stage startup funding in hospitality: Effects on incumbents' market value," Annals of Tourism Research, Elsevier, vol. 95(C).

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