The efficient IPO market hypothesis: theory and evidence

Kevin R. James and Marcela Valenzuela

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We derive the optimal underwriting method and the quantitative initial public offering (IPO) pricing rule that this method implies in a market with informational frictions consisting of fully rational banks, issuers, and investors. In an efficient IPO market, an issuer's expected initial return will be determined entirely by the combination of this pricing rule and issuer fundamentals. Applying this rule, we find that we can explain the quantitative magnitude of the principal aspects of the time-series and cross-sectional variation in IPO average initial returns. We conclude that the IPO market is efficient.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2020-11-01
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (1)

Published in Journal of Financial and Quantitative Analysis, 1, November, 2020, 55(7), pp. 2304 - 2333. ISSN: 0022-1090

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:104020

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