Initial Public Offerings in Hot and Cold Markets

Abstract

The literature on IPOs offers a wide variety of explanations to justify the dramatic swings in the volume of IPOs observed in the market. Many theories predict that hot IPO markets are characterized by clusters of firms in particular industries for which a technological innovation has occurred, suggesting that hot and cold market IPO firms will differ in quality, prospects, or types of business. Others suggest hot market IPOs are firms that take advantage of irrational investors. We compare firms that go public in a number of hot and cold markets during 1975-2000, examining them at the time of the IPO and during the following five years. We find that both hot and cold market IPOs are largely concentrated in the same narrow set of industries and hot markets for many industries occur at the same time. We also find few distinctions in quality and scant evidence that hot market IPOs have better growth prospects. Our results suggest that technological innovations are not the primary determinant of hot markets because IPO markets cycle with greater frequency than the underlying innovations, and are more in line with the view that hot markets reflect greater investor optimism, though not necessarily active manipulation by managers.

Rational IPO Waves

“…We define IPO waves as follows. Following Helwege and Liang (2004), we calculate 3‐month centered moving averages in which the number of IPOs in each month is averaged with the numbers of IPOs in the months immediately preceding and following that month. We define “hot markets” as those months in which the moving average falls into the top quartile across the whole simulated sample.…”

Are Assurance Services Provided by Auditors on Initial Public Offerings Influenced by Market Conditions?*

“…9. Due to data limitations (availability of auditor fee data), our sample begins in 1988, rather than 1975 as in Helwege and Liang 2004. The period between 1975and 1988 has a larger proportion of neutral and cold months than the period since 1988, which explains the slightly higher percentage of IPOs that we observe issued during hot months.…”

“…Theories based on asymmetric information predict that hot markets induce IPOs by high-quality companies because the costs of asymmetric information are lower in hot markets (Allen and Faulhaber 1989). Helwege and Liang (2004) perform a comprehensive study to determine whether the various hot market explanations have descriptive validity. Their evidence suggests that hot markets tend to be hot for all industries and does not support the idea that hot IPO markets are driven by product innovation in particular industries.…”

“…ColdMarket is an indicator variable that is assigned 1 when the firm's IPO occurred during a month when the three-month moving average of IPO volume is less than 10.5 (Helwege and Liang 2004); 0 otherwise. CAR Vol.…”

Does the effect of revealed private information on initial public offering (IPO) first trading day return differ by IPO market heat?

“…The question of the importance of the relationship between private information production and the possible clustering of IPOs by industry in IPO regimes is debated in the literature. Helwege and Liang () and Loughran and Ritter () generally conclude that firm characteristics and industry are relatively stable over time. In contrast, Benveniste et al .…”