RFS Advance Access originally published online on January 22, 2007
Review of Financial Studies 2007 20(4):983-1020; doi:10.1093/revfin/hhm004
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A Theory of IPO Waves
Department of Finance, University of Illinois at Chicago and Lehman Brothers
Address correspondence to Ping He, 601 S Morgan, UH 2431, Chicago, IL 60607, or e-mail: heping{at}uic.edu
JEL: G24, C73
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Abstract |
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In the IPO market, investors coordinate on acceptable IPO price based on the performance of past IPOs, and this generates an incentive for investment banks to produce information about IPO firms. In hot periods, the information produced by investment banks improves the quality of IPO firms, and this allows ex ante low quality firms to go public and increases the secondary market price, thus synchronizing high IPO volumes and high first day returns. When investment banks behave asymmetrically in information production, the "reputations" of investment banks are interpreted as a form of market segmentation to economize on the social cost of information production.
This is a revised version of the third chapter of my PhD dissertation at the University of Pennsylvania. I am in debt to my dissertation advisor, Gary Gorton, for his enlightening supervision and tremendous encouragement. Invaluable advice is greatly appreciated from the other members of my dissertation committee, George Mailath, Richard Kihlstrom, Nicholas Souleles and Armando Gomes. I am grateful for insightful comments and constructive suggestions from Maureen O'Hara (the editor) and an anonymous referee. I also want to thank Michael Brennan, Richard Rosen and the seminar participants from University of Pennsylvania, Carnegie Mellon University, University of Illinois at Chicago, New York Fed and Chicago Fed for helpful discussions. Financial supports from the Department of Economics at the University of Pennsylvania and the Department of Finance at the University of Illinois at Chicago are gratefully acknowledged.