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Firm-specific risk and IPO market cycles

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  • Marie-Claude Beaulieu
  • Habiba Mrissa Bouden

Abstract

This article characterizes the role of risk in the initial public offering (IPO) cycle. While most of the previous literature uses the volatility of IPO initial returns to measure risk, we focus on different risk measures, namely firm-level systematic and idiosyncratic volatilities and the market-wide implied volatility index (VIX), to assess their role in the IPO cycle. Our results shed new light on (1) which risk measure is important in the determination of IPO cycles, (2) the temporal pattern of each risk component across issuing firms and (3) the relationship between market-wide uncertainty and IPO risk. Our findings reveal a lead-lag relationship between IPO waves, VIX and the IPO systematic risk measure. We also highlight the fact that market-level uncertainty predicts IPO activity and the level of idiosyncratic risk of the next-period-issuing firms. Issuing firms' systematic risk can only be predicted by the systematic risk of firms now proceeding to their offering. The main implication resulting from our study is that one can better anticipate 'hot-issue' markets, as well as the specific risk components of future new issues. This will help improve upon the regulatory environment, IPO investment decisions and IPO timing given market receptivity.

Suggested Citation

  • Marie-Claude Beaulieu & Habiba Mrissa Bouden, 2015. "Firm-specific risk and IPO market cycles," Applied Economics, Taylor & Francis Journals, vol. 47(50), pages 5354-5377, October.
    • Handle: RePEc:taf:applec:v:47:y:2015:i:50:p:5354-5377
    DOI: 10.1080/00036846.2015.1047091
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    References listed on IDEAS

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