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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," LSE Research Online Documents on Economics 104020, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:104020
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    References listed on IDEAS

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    10. repec:bla:jfinan:v:53:y:1998:i:1:p:285-311 is not listed on IDEAS
    11. Céline Gondat‐Larralde & Kevin R. James, 2008. "IPO Pricing and Share Allocation: The Importance of Being Ignorant," Journal of Finance, American Finance Association, vol. 63(1), pages 449-478, February.
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    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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