Transitory Market Shocks and IPO Timing
79 Pages Posted: 17 Dec 2011 Last revised: 12 Mar 2024
Date Written: March 10, 2024
Abstract
Using a cointegration-based decomposition of stock market shocks, we show that the transitory component of stock returns is the main driver of firms’ IPO timing decisions. Upon transitory shocks, both weak start-ups and innovative start-ups with robust growth opportunities to go public, leading to a surge in IPO volume. Firms timing their IPOs around transitory market shocks exhibit an extreme bifurcation in long-run performances, thickening the tails of the IPO-quality distribution at both ends. We observe more occurrences of long-run outperformance, characterized by more innovative outputs and higher acquisition probabilities, alongside a substantial increase in severe underperformance and negative delistings. In contrast, we find no evidence indicating a significant relationship between positive permanent market shocks and IPO timing.
Keywords: Permanent-transitory decomposition, initial public offerings, market timing, long-run performance
JEL Classification: G02, G12, G32
Suggested Citation: Suggested Citation