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Heterogeneous relationship between IPO return and risk across idiosyncratic variance characteristics

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  • Beneda, Nancy
  • Zhang, Yilei

Abstract

This paper analyzes the levels and changes in the post-IPO stock return volatility and provides insights into market responses to the presence of firm-specific risk. First, we document a negative relation between initial idiosyncratic volatility level and the post-IPO volatility change in that initially low volatility firms have more volatility increase and vice verse. This evidence suggests fundamental firm-specific changes after the IPO. Further, we find that underpricing and short-run post-IPO returns are positively related to the initial and corresponding idiosyncratic risk level. This finding suggests that underpricing compensates investors for acquiring costly information and firm-specific risk information is being incorporated into offer prices. Finally, we find that higher long-run post-IPO performance is related to both lower initial risk level and decreasing risk in the first year after the IPO.

Suggested Citation

  • Beneda, Nancy & Zhang, Yilei, 2009. "Heterogeneous relationship between IPO return and risk across idiosyncratic variance characteristics," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(4), pages 1298-1316, November.
    • Handle: RePEc:eee:quaeco:v:49:y:2009:i:4:p:1298-1316
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    References listed on IDEAS

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    1. Reber, Beat, 2017. "Does mispricing, liquidity or third-party certification contribute to IPO downside risk?," International Review of Financial Analysis, Elsevier, vol. 51(C), pages 25-53.
    2. Md Hamid Uddin & Mahendra Raj, 2012. "Aftermarket Risk And Underpricing Of Initial Public Offers In The Arabian Gulf Countries: An Empirical Analysis," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 6(3), pages 123-138.
    3. Xiao-cheng Zhang & Miaomiao Zhang & Shao-an Huang & Yongsheng Zhou, 2015. "Heterogeneous expectations, IPO Underpricing and issuing mechanism," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 1(1), pages 1-14, December.

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