IPO Market Timing

Author: Alt inodot , Aydo gbreve an

Source: Review of Financial Studies, Volume 18, Number 3, 2005 , pp. 1105-1138(34)

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Abstract:

I develop a model of information spillovers in initial public offerings (IPOs). The outcomes of pioneers’ IPOs reflect participating investors’ private information on common valuation factors. This makes the pricing of subsequent issues relatively easier and attracts more firms to the IPO market. I show that IPO market timing by the followers emerges as an equilibrium clustering pattern. High offer price realizations for pioneers’ IPOs better reflect investors’ private information and trigger a larger number of subsequent IPOs than low offer price realizations do. This asymmetry in the spillover effect is more pronounced early on in a hot market. The model provides an explanation for recent empirical findings that illustrate the high sensitivity of going public decision to IPO market conditions.

Keywords: time optimal control problems; Neumann parabolic equations with an infinite number of variables; Dubovitskii–Milyutin theorem; conical approximations; optimality conditions; Weierstrass theorem

Document Type: Research article

DOI: http://dx.doi.org/10.1093/rfs/hhi022

Publication date: 2005-01-01

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The Review of Financial Studies is a major forum for the promotion and wide dissemination of significant new research in financial economics. As reflected by its broadly based editorial board, the Review balances theoretical and empirical contributions. The primary criteria for publishing a paper are its quality and importance to the field of finance, without undue regard to its technical difficulty. Finance is interpreted broadly to include the interface between finance and economics. The Review is sponsored by The Society for Financial Studies. The editors of the Review and officers of the Society are elected for limited terms.