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Rational IPO Waves




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    • *Ľuboš Pástor and Pietro Veronesi are at the Graduate School of Business, University of Chicago. Both authors are also affiliated with the CEPR and NBER. Helpful comments were gratefully received from Malcolm Baker, John Campbell, John Cochrane, George Constantinides, Doug Diamond, Frank Diebold, Gene Fama, John Heaton, Jean Helwege, Steve Kaplan, Jason Karceski, Martin Lettau, Deborah Lucas, Robert Novy-Marx, Michal Pakoš, Jay Ritter, Tano Santos, Rob Stambaugh, Per Strömberg, René Stulz, Lucian Taylor, Dick Thaler, Luigi Zingales; an anonymous referee; seminar participants at Bocconi University, Comenius University, Duke University, Federal Reserve Bank of Chicago, HEC Montreal, INSEAD, London Business School, MIT Sloan, Rice University, University of Brescia, University of Chicago, University of Illinois at Urbana-Champaign, University of Pennsylvania, University of Southern California, Vanderbilt University; and the conference participants at the Fall 2003 NBER Asset Pricing Meeting and the 2004 Western Finance Association Meetings. Huafeng Chen, Karl Diether, Lukasz Pomorski, and Anand Surelia provided expert research assistance. This paper previously circulated under the title “Stock Prices and IPO Waves.”


We argue that the number of firms going public changes over time in response to time variation in market conditions. We develop a model of optimal initial public offering (IPO) timing in which IPO waves are caused by declines in expected market return, increases in expected aggregate profitability, or increases in prior uncertainty about the average future profitability of IPOs. We test and find support for the model's empirical predictions. For example, we find that IPO waves tend to be preceded by high market returns and followed by low market returns.