Excess Initial Returns in Ipos

Posted: 2 May 2003

See all articles by Tore E. Leite

Tore E. Leite

Norwegian School of Economics (NHH)

Date Written: April 11, 2003

Abstract

The empirical evidence on initial returns in IPOs reveals average overpricing as well as underpricing, depending on the type of security offered for sale. Consistent with this evidence, the present paper develops a model in which an IPO may be overpriced in equilibrium relative to its expected (or average) aftermarket price. Overpricing disappears, however, once the offer price is compared to an allocation-weighted expectation, where the weights are given by the extent to which the number of securities that are floated (at the posted price) is positively related to the demand for allocations. Empirically, the model implies that equally-weighted returns underestimate initial returns in IPOs, and hence that inferences based on equally-weighted returns may be misleading.

Keywords: initial public offerings, excess initial returns, allocation-weighted returns, equally-weighted returns, stabilization

JEL Classification: D82, G24, G32

Suggested Citation

Leite, Tore E., Excess Initial Returns in Ipos (April 11, 2003). Available at SSRN: https://ssrn.com/abstract=388260

Tore E. Leite (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
N-5045 Bergen
Norway
+47 5595 9343 (Phone)
+47 5595 9841 (Fax)

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