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JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS
VOL. 39, NO. 3, SEPTEMBER 2004
COPYRIGHT 2004, SCHOOL OF BUSINESS ADMINISTRATION, UNIVERSITY OF WASHINGTON, SEATTLE, WA 98195
Initial Public Offerings in Hot and Cold Markets
Jean Helwege and Nellie Liang£
Abstract
The literature offers many explanations for why the IPO market cycles from hot to cold. These include theories in which hot markets represent clusters of IPOs in a new industry, and signaling models that predict that hot markets draw in better quality firms. Others suggest hot market IPOs’ stock returns reflect their poor quality. We compare IPOs over cycles during 1975–2000 and find that hot and cold IPO markets do not differ so much in the characteristics of the firms that go public as in the quantity of firms that go public. Both hot and cold IPOs are largely concentrated in the same narrow set of industries and they have few distinctions in profits, age, or growth potential. Our results suggest that hot markets are not driven primarily by changes in adverse selection costs, managerial opportunism, or technological innovations, but more likely reflect greater investor optimism.
I. Introduction
The initial public offering (IPO) market has exhibited dramatic swings in issuance that are often referred to as hot and cold markets (see Ibbotson and Jaffe (1975) and Ritter (1984)). Hot IPO markets have been described as having an unusually high volume of offerings, severe underpricing, frequent oversubscription of offerings, and (at times) concentrations in particular industries.1 In contrast, cold IPO markets have much lower issuance, less underpricing, and fewer instances of oversubscription. Furthermore, Loughran, Ritter, and Rydqvist (1994),
£ Helwege, helwege 1@cob.osu.edu, Department of Finance, University of Arizona, Tucson, AZ 85721; and Liang, nliang@frb.gov, Board of Governors of the Federal Reserve System, Division of Research and Statistics, Capital Markets Section, Mail Stop 89,
VOL. 39, NO. 3, SEPTEMBER 2004
COPYRIGHT 2004, SCHOOL OF BUSINESS ADMINISTRATION, UNIVERSITY OF WASHINGTON, SEATTLE, WA 98195
Initial Public Offerings in Hot and Cold Markets
Jean Helwege and Nellie Liang£
Abstract
The literature offers many explanations for why the IPO market cycles from hot to cold. These include theories in which hot markets represent clusters of IPOs in a new industry, and signaling models that predict that hot markets draw in better quality firms. Others suggest hot market IPOs’ stock returns reflect their poor quality. We compare IPOs over cycles during 1975–2000 and find that hot and cold IPO markets do not differ so much in the characteristics of the firms that go public as in the quantity of firms that go public. Both hot and cold IPOs are largely concentrated in the same narrow set of industries and they have few distinctions in profits, age, or growth potential. Our results suggest that hot markets are not driven primarily by changes in adverse selection costs, managerial opportunism, or technological innovations, but more likely reflect greater investor optimism.
I. Introduction
The initial public offering (IPO) market has exhibited dramatic swings in issuance that are often referred to as hot and cold markets (see Ibbotson and Jaffe (1975) and Ritter (1984)). Hot IPO markets have been described as having an unusually high volume of offerings, severe underpricing, frequent oversubscription of offerings, and (at times) concentrations in particular industries.1 In contrast, cold IPO markets have much lower issuance, less underpricing, and fewer instances of oversubscription. Furthermore, Loughran, Ritter, and Rydqvist (1994),
£ Helwege, helwege 1@cob.osu.edu, Department of Finance, University of Arizona, Tucson, AZ 85721; and Liang, nliang@frb.gov, Board of Governors of the Federal Reserve System, Division of Research and Statistics, Capital Markets Section, Mail Stop 89,