Leaders and Followers in a Hot IPO Market

Finance

Further details

We model IPO timing within a hot market as a game between private firms that need financing for their projects.  We show that it can be optimal for firms with good projects to lead a hot market and to under price their issues in order to signal their quality to uninformed investors.  We test our model using U.S. IPO data.  We find that issues of leaders are underpriced 45% more on average than those of followers.  Moreover, leaders have significantly higher market to book ratios at the time of their IPOs.  Furthermore they grow faster after their issues and display a better share performance.

JEL Classification: G32; L1

Keywords: Initial Public Offerings, underpricing, signaling