Hot and Cold IPO Markets: Identification Using a Regime Switching Model

Tim Brailsford (), Richard Heaney, John Powell and Jing Shi
Additional contact information
Tim Brailsford: Australian National University, Australia
Richard Heaney: Australian National University, Australia
John Powell: University of Otago, New Zealand
Jing Shi: Australian National University, Australia

Multinational Finance Journal, 2000, vol. 4, issue 1-2, 35-68

Abstract: The market for unseasoned equity has the unusual and distinguishing feature of periods of concentrated activity in terms of both volume and underpricing. This paper formally documents the existence of such periods using a regime-switching model that dates transitions between hot and cold states. A number of hot periods are identified over a 20-year period using a variety of IPO activity measures that capture different aspects of new issue volume, proceeds and underpricing. The study further documents a leading relationship between underpricing and IPO volume of up to six months. This relationship supports the contention that the decision to issue is a function of current underpricing. Various reasons are hypothesised for this result and the paper finds supportive evidence through a VAR analysis that reveals the influence of stock market and business conditions.

Keywords: hot issues; IPOs; regime-switching; stock market; unseasoned issues (search for similar items in EconPapers)
JEL-codes: G12 G14 G32 (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (11)

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