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IPO First-Day Return and Ex Ante Equity Premium

Published online by Cambridge University Press:  18 February 2011

Hui Guo
Hui Guo*
Affiliation:
College of Business Administration, University of Cincinnati, PO Box 210195, Cincinnati, OH 45221. hui.guo@uc.edu
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Abstract

This paper proposes a measure of ex ante equity premium, IPOFDR, which is the average difference between the initial public offering (IPO) offer price and the 1st-trading-day close price. I test the idea in 3 ways. First, there is a positive relation between IPOFDR and future market returns. Second, changes in IPOFDR help explain the cross section of stock returns. Third, the predictive power of IPOFDR for stock returns reflects mainly its close relation with market variance and average idiosyncratic variance—arguably measures of systematic risk. These results cast doubt on the notion that the IPO 1st-day return is a measure of investor sentiment.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 3 , June 2011 , pp. 871 - 905
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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