When to Buy and Sell the Shares of the Publicly Traded Rivals of a Firm Making an Initial Public Offering: A New Model

Abstract

A review of the literature regarding the supply shock effects of a firm's initial public offering on its publicly traded rivals leads to a redefinition of the competitive and contagion effects. Owing to the persistence of the competitive effect over time and in different markets, it is identified as an anomaly. Therefore, we develop a 3D graphic tool capable of measuring systematically, from a continuous perspective, how information leaks into a stock market and how its effect on the returns of publicly traded companies spreads, in depth and length. The tool can be applied to any event study. In this study, it was used to visualize the short-term effects produced by a firm's initial public offering on its traded rivals in the Spanish stock market, using data over a 30-year period. A competitive effect, similar in size and extent to the ones detected by the state-of-the-art studies, was demonstrated. These results are comparable to the projections of the main asset pricing models. This demonstrates the similarity between the above stated competitive effect and the substitution effect related to the supply and demand theory regarding substitutive products. Based on this, a theory capable of explaining the competitive effect is proposed.