An empirical assessment of initial return volatility in newly listed stocks

Paul B. McGuinness

Applied Economics Letters, 2016, vol. 23, issue 11, 804-811

Abstract: A stock’s first month of listing or ‘seasoning’ is often characterized by sharp volatility in initial returns. Such volatility is likely to be even more pronounced in initial public offering (IPO) markets where retail investors exert significant influence. I consider initial return volatility for IPOs pitched in Hong Kong, where the market organizer requires a sizeable fraction of shares on offer to be assigned to a retail subscription tranche. Within this context, I examine the pattern and determinants of IPO stocks’ initial return volatility levels over their first 30 days of ‘seasoning’. I observe that IPO underpricing, market sentiment and float size figure as key explanatory factors. Results also reaffirm the importance of information asymmetry effects (Ritter, 1984; Beatty and Ritter, 1986; and Lowry et al., 2010). Larger IPO firms with tighter offer price spreads and more reputable underwriters exhibit noticeably greater price stability. I also assess Ljungqvist, Nanda and Singh’s (2006) proposition that underpricing in ‘hot’ IPOs protects issuers and subscribers against a subsequent fall-off in issuer sentiment. Via analysis of retail tranche share allotments, I meaningfully extend findings (Jiang and Li, 2013) in this area.

Date: 2016
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DOI: 10.1080/13504851.2015.1109035

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