Good IPOs draw in bad: Inelastic banking capacity and hot markets

Khanna, N and Noe, T H and Sonti, R (2008) Good IPOs draw in bad: Inelastic banking capacity and hot markets. Review of Financial Studies, 21 (5). pp. 1873-1906.

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Abstract

We posit that screening IPOs requires specialized labor which is in fixed supply. A sudden increase in demand for IPO financing increases the compensation of IPO screening labor. This results in reduced screening, encouraging sub-marginal firms to enter the IPO market, further fueling the demand for screening labor. The model's conclusions are consistent with empirical findings of increased underpricing during hot markets, positive correlation between issue volume and underpricing, and with tipping points between hot and cold markets. Finally, the model makes sharp predictions relating the IPO market to fundamental values of firms and to investment banking returns.

ISB Creators:
ISB CreatorsORCiD
Sonti, RUNSPECIFIED
Item Type: Article
Uncontrolled Keywords: IPO,Underpricing,Labor Constraint
Subjects: Business and Management
Finance
Depositing User: Veeramani R
Date Deposited: 31 Oct 2014 20:24
Last Modified: 01 Nov 2014 05:17
URI: http://eprints.exchange.isb.edu/id/eprint/102
Publisher URL: http://dx.doi.org./10.1093/rfs/hhm018
Publisher OA policy: http://www.sherpa.ac.uk/romeo/issn/0893-9454/
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