The "Hot Issue" Market of 1980

Posted: 17 Nov 2009

See all articles by Jay R. Ritter

Jay R. Ritter

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: 1984

Abstract

Determines the "hot issue" market of 1980 to result primarily from natural resource firms. The hot issue market extending from January 1980 to March 1981 is characterized by an average initial return of 48.4% on unseasoned new issues of common stock, as compared to the 16.3% average initial return of the cold issue period for the remainder of 1977-1982. To analyze the hot issue market, monthly average initial returns are calculated using 1977-82 data of SEC-registered initial pubic offerings as reported in Going Public: The IPO Reporter (1975-82), which continues Ibbotson and Jaffe's (1975) study of the previous 1960-76 period. An equilibrium phenomenon explanation is rejected, since when analyzed separately, startup natural resource-related firms saw a significant boom in returns - 110.9% as compared to 18.3% in the cold issue period - whereas a hot issue market is barely perceptible in other markets. The possibility that the hot issue market resulted from a high percentage of underpriced high-risk offerings, according to Rock's (1982) model, is also rejected, since the data shows that natural resource issues had the same relation between risk and expected initial return as did non-natural resource issues during the cold issue market, and then dramatically increased in the hot issue market. Thus, the explanation lies in a nonstationarity in the risk-initial return relation for natural resource firms, and points to differing activity by market segment. This study implies that the best time for issuing firms to go public is during the unstable, high-volume period immediately following a hot issue market for their industry. (CJC)

Keywords: Industry sectors, Stock offerings, Rates of return, Initial public offerings (IPO), Natural resources, Risk assessment, Underpricing

Suggested Citation

Ritter, Jay R., The "Hot Issue" Market of 1980 (1984). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN: https://ssrn.com/abstract=1506366

Jay R. Ritter (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
(352) 846-2837 (Phone)
(352) 392-0301 (Fax)

HOME PAGE: http://https://site.warrington.ufl.edu/ritter

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