Publication

IPO post-issue markets: Questionable predilections but diligent learners?

2001
Journal Articles

Abstract

There appear to be no anomalies in the aftermarket of a sample of 4,848 U.S. IPOs over the period 1975 to 1995, except issues offered below $6. Risk is priced in the aftermarket in accordance with Rubinstein's asset-pricing model. Unlike under the efficient markets hypothesis (EMH), however, market priors about the probability of future default are not unbiased at the IPO date. Still, subsequent learning is rational: the market uses Bayes' law with a correct-likelihood function (of news given the eventual fate of an issue). That is, the hypothesis of an efficiently learning market (ELM) cannot be rejected. We produce direct evidence in support of these statements, based on a new class of tests. We also provide indirect evidence, by documenting a gradual convergence of IPO prices towards EMH as issues mature.

Official source

https://infoscience.epfl.ch/entities/publication/b1b4c207-9b60-459d-9ba7-6f4a422676f5

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2001
Journal Articles

Abstract

Official source

https://infoscience.epfl.ch/entities/publication/b1b4c207-9b60-459d-9ba7-6f4a422676f5

About this result

Related concepts (30)

Efficient-market hypothesis

The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information. Because the EMH is formulated in terms of risk adjustment, it only makes testable predictions when coupled with a particular model of risk.

Capital asset pricing model

In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.

Asset pricing

In financial economics, asset pricing refers to a formal treatment and development of two main pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, but correspondingly, these stem from either general equilibrium asset pricing or rational asset pricing, the latter corresponding to risk neutral pricing.

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IPO post-issue markets: Questionable predilections but diligent learners?

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