IPO Market Timing Author(s): Aydoğan Alti Source: The Review of Financial Studies, Vol. 18, No. 3 (Autumn, 2005), pp. 1105-1138 Published by: Oxford University Press. Sponsor: The Society for Financial Studies. Stable URL: http://www.jstor.org/stable/3598087 Accessed: 10/04/2010 08:09 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=oup. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact email@example.com.
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IPO Market Timing
AydoganAltl University of Texas at Austin
I develop a model of information spillovers in initial public offerings (IPOs). The outcomes of pioneers' IPOs reflect participating investors' private information on common valuation factors. This makes the pricing of subsequentissues relativelyeasier and attracts more firms to the IPO market. I show that IPO market timing by the followers emerges as an equilibriumclustering pattern. High offer price realizations for pioneers' IPOs better reflect investors' private information and trigger a larger number of subsequent IPOs than low offer price realizationsdo. This asymmetryin the spillover effect is more pronounced early on in a hot market. The model provides an explanation for recent empirical findings that illustrate the high sensitivity of going public decision to IPO market conditions.
Clustering of initial public offerings (IPOs) is a well-documented phenomenon. Starting with Ibbotson and Jaffe (1975), several studies have shown that IPOs tend to cluster both in time and in industries.1 What causes these hot and cold market cycles is less clear, however. While the IPO clustering could potentially be due to clustering of real investment opportunities, empirical findings suggest that this link is weak. Most IPO firms do not have urgent funding needs [Pagano, Panetta, and Zingales (1998)]; instead, firms' equity-issue decisions seem to be driven mainly by market timing attempts [Baker and Wurgler (2002)]. Furthermore, hot versus cold market IPO firms do not appear to differ in their growth prospects or future operating performance [Helwege and Liang (2002)]. Recent empirical research has focused on information spillovers as the main driver of the hot market phenomenon. The idea is that information generated in valuing a set of pioneers makes the valuation of followers easier and hence triggers more IPOs. The evidence for the spillover effect is strong. Lowry and Schwert (2002) and Benveniste, Ljungqvist, Wilhelm, and Yu (2003) find that IPO volume is highly sensitive to the outcomes of recent and contemporaneous offerings. Specifically, if the A previousversion of this articlewas circulatedunder the title "Clustering Patternsin InitialPublic Offerings," which is also the second chapter of my dissertationat CarnegieMellon University.I would like to thank Rick...