Question 10.17

10.17 The timing of initial public offerings (IPOs).

Initial public offerings (IPOs) have tended to group together in time and in sector of business. Some researchers hypothesize this is due to managers either speeding up or delaying the IPO process in hopes of taking advantage of a “hot” market, which will provide the firm high initial valuations of their stock.10 The researchers collected information on 196 public offerings listed on the Warsaw Stock Exchange over a six-year period. For each IPO, they obtained the length of the IPO offering period (time between the approval of the prospectus and the IPO date) and three market return rates. The first rate was for the period between the date the prospectus was approved and the “expected” IPO date. The second rate was for the period 90 days prior to the “expected” IPO date. The last rate was between the approval date and 90 days after the “expected” IPO date. The “expected” IPO date was the median length of the 196 IPO periods. They regressed the length of the offering period (in days) against each of the three rates of return. Here are the results:

Period -value
1 48.018 −129.391 0.0008 −0.238
2 49.478 −114.785 <0.0001 −0.414
3 47.613 −41.646 0.0463 −0.143
  1. What does this table tell you about the relationship between the IPO offering period and the three market return rates?
  2. The researchers argue that since the strongest correlation is for the second period and the lowest is for the third period, there is evidence for their hypothesis. Do you agree with this conclusion? Explain your answer.

10.17

(a) All 3 market return rates are significant predictors of the IPO offering period; however, the first 2 are much stronger predictors than the rate for the 3rd period.