Evidence on Price Stabilization and Underpricing in Early IPO Returns

Authors

  • Daniel Asquith,

    1. Deloitte & Touche
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  • Jonathan D. Jones,

    1. Office of Thrift Supervision
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  • Robert Kieschnick

    1. Federal Communication Commission
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    • Asquith is with Deloitte & Touche, Jones is at the Office of Thrift Supervision, and Kieschnick is with the Federal Communications Commission. The views expressed in this paper are those of the authors and not of Deloitte & Touche, or the Office of Thrift Supervision, or the Federal Communications Commission. We wish to thank Peter Algert, Bruce McDonald, Bruce Mc-Cullough, Neil Pearson, Jay Ritter, Sheridan Titman, Ivo Welch, Bill Wilhelm, the editor, and an anonymous referee for many helpful comments on earlier drafts of the paper. We also wish to thank James Hamilton for providing GAUSS code for his implementation of the EM algorithm and DianaWhistler for providing programming advice on implementing different procedures in SHAZAM.

Abstract

Using data on 560 firm-commitment initial public offerings of common stock for the 1982–1983 period, we find that the cross-sectional distribution of one-day returns is modeled better as a mixture of two distributions, with the parameter estimates of one distribution being consistent with underpricing and the other with price stabilization. Further, the evidence that early IPO returns are drawn from a mixture distribution persists for at least four weeks. The implications of these results for the analysis of IPO returns are illustrated by examining the influence of a measure of ex ante price uncertainty on IPO pricing.

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