RFS Advance Access published online on March 29, 2008
Review of Financial Studies, doi:10.1093/rfs/hhn025
Do IPOs Affect the Prices of Other Stocks? Evidence from Emerging Markets
Universidad Adolfo Ibáñez & IM Trust
Pontificia Universidad Católica de Chile
Address correspondence to Borja Larrain, Pontificia Universidad Católica de Chile, Escuela de Administración, Avenida Vicuña Mackenna 4860, Macul, Santiago, Chile; telephone: 562-354-4025; e-mail: blarrain{at}faceapuc.cl.
JEL Classification: G12, G14, G15
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Abstract |
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We show that the introduction of a large asset permanently affects the prices of existing assets in a market. Using data from 254 initial public offerings (IPOs) in 22 emerging markets, we find that portfolios that covary highly with the IPO experience a decline in prices relative to other portfolios during the month of the issue. The effects are stronger when the IPO is issued in a market that is less integrated internationally and when the IPO is bigger. This evidence is consistent with the idea that shocks to asset supply have a significant effect on asset prices.
A previous draft circulated under the title "Supply matters for asset prices: Evidence from IPOs in emerging markets." We thank an anonymous referee, Adam Reed (WFA discussant), Pedro Santa-Clara, Andrei Shleifer, Jeremy Stein, Rossen Valkanov, Michael Weisbach (the editor), Paul Willen, and Motohiro Yogo for insightful comments and suggestions. We also thank seminar participants at the Federal Reserve Bank of Boston, Princeton, Stockholm School of Economics, and the Western Finance Association Annual Meeting 2006. Maria Giduskova and Elena Myronova provided excellent research assistance. Part of this research was done while Larrain was an economist at the Federal Reserve Bank of Boston. He thanks his colleagues there for a great research environment. The views expressed in this paper are the authors’ only and do not necessarily represent those of the Federal Reserve Bank of Boston or the Federal Reserve System.