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Heterogeneous relationship between IPO return and risk across idiosyncratic variance characteristics

Nancy Beneda and Yilei Zhang

The Quarterly Review of Economics and Finance, 2009, vol. 49, issue 4, 1298-1316

Abstract: This paper analyzes the levels and changes in the post-IPO stock return volatility and provides insights into market responses to the presence of firm-specific risk. First, we document a negative relation between initial idiosyncratic volatility level and the post-IPO volatility change in that initially low volatility firms have more volatility increase and vice verse. This evidence suggests fundamental firm-specific changes after the IPO. Further, we find that underpricing and short-run post-IPO returns are positively related to the initial and corresponding idiosyncratic risk level. This finding suggests that underpricing compensates investors for acquiring costly information and firm-specific risk information is being incorporated into offer prices. Finally, we find that higher long-run post-IPO performance is related to both lower initial risk level and decreasing risk in the first year after the IPO.

Keywords: Initial; public; offering; Idiosyncratic; risk; Variance; ratio; test; IPO; underpricing; Long-run; performance (search for similar items in EconPapers)
Date: 2009
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