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Initial Public Offerings in Hot and Cold Markets

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Abstract

Asymmetric information models characterize hot IPO markets as periods when better quality firms have an incentive to issue equity, and cold markets when the lemons premium associated with equity is too high to draw in many issuers. Recent empirical evidence, however, suggests that firms that issue in hot markets are a major source of stock price underperformance of equity issuers. We investigate these opposing views with data on IPO firms that issued in 1983, a hot market, and 1988, a cold market. We find that the two sets of firms have similar operating performance, but stock returns are worse for firms that went public in the hot market. Our results are largely consistent with investor overoptimism in hot markets, but not with the asymmetric information models.

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  • Jean Helwege & J. Nellie Liang, "undated". "Initial Public Offerings in Hot and Cold Markets," Finance and Economics Discussion Series 1996-34, Board of Governors of the Federal Reserve System (U.S.), revised 10 Dec 2019.
    • Handle: RePEc:fip:fedgfe:1996-34
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    File URL: http://www.federalreserve.gov/pubs/feds/1996/199634/199634pap.pdf
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    Cited by:

    1. Tim Brailsford & Richard Heaney & John Powell & Jing Shi, 2000. "Hot and Cold IPO Markets: Identification Using a Regime Switching Model," Multinational Finance Journal, Multinational Finance Journal, vol. 4(1-2), pages 35-68, March-Jun.

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    Keywords

    Initial public offerings; stock price underperformance; asymmetric information;
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