“Hot Issue” IPO Markets and its Consequences for Issuing Firms and Investors: The UK Market of 2000
Managers make use of the fact that initial public offerings (IPOs) are discretionary events to select the time for going public, causing cycles in the new issues markets. This paper provides evidence from five clinical studies during the 2000 IPO market in the UK suggesting that the, so called, “hot issue” markets intensify two other well documented anomalies in finance; the initial underpricing and the long run underperformance of new issues. Several behavioural explanations for the return performance of the studied IPOs are explored. In this investigation, the Rock model which relates the level of short run underpricing of IPOs with the information asymmetry between investors seems to work in its precise opposite due to the intense level of speculation over the issues. This behavioural analysis also provides support for the divergence of opinions model since the observed long run underperformance can be associated with the availability of previous information about the firm. Earnings management through discretionary accruals prior to the floatation is also found to be present influencing the performance of the companies where this analysis could be carried out. The results add to the challenge that the behaviour of IPOs pose to the market efficiency hypothesis.