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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 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, 2019. "The efficient IPO market hypothesis: theory and evidence," LSE Research Online Documents on Economics 118934, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:118934
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    File URL: http://eprints.lse.ac.uk/118934/
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    References listed on IDEAS

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    More about this item

    Keywords

    initial public offerings; underwriters; IPO underpricing; efficient markets hypothesis;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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