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The Variability of IPO Initial Returns


  • Michelle Lowry is from Penn State University. Micah S. Officer is from Loyola Marymount University. G. William Schwert is from the University of Rochester and NBER. We are indebted to Jay Ritter for the use of his data. We received valuable comments from Campbell Harvey (Editor), Harry DeAngelo, Craig Dunbar, Robert Engle, Laura Field, Ravi Jagannathan, Jay Ritter, Ann Sherman, Ivo Welch, Donghang Zhang, Jerry Zimmerman, and two anonymous referees. We also received valuable comments from the participants in seminars at Boston College, Indiana University, New York University, Penn State University, the University of Arizona, the University of Rochester, the University of Southern California, the University of Toronto, and the University of Western Ontario, and from participants at the Duke-UNC Corporate Finance Conference and at the Harvard Business School Entrepreneurship, Venture Capital and Initial Public Offerings Conference. Much of the work for this project was completed while Officer was on the faculty at the Marshall School of Business at USC. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.


The monthly volatility of IPO initial returns is substantial, fluctuates dramatically over time, and is considerably larger during “hot” IPO markets. Consistent with IPO theory, the volatility of initial returns is higher for firms that are more difficult to value because of higher information asymmetry. Our findings highlight underwriters’ difficulty in valuing companies characterized by high uncertainty, and raise serious questions about the efficacy of the traditional firm-commitment IPO process. One implication of our results is that alternate mechanisms, such as auctions, could be beneficial for firms that value price discovery over the auxiliary services provided by underwriters.