Abstract

The puzzle of hot and cold issue markets has attracted substantial interest in the academic community. The behavior of IPO volume and initial returns over time is well documented respectively (see, Ibbotson and Jaffe (1975), Ritter (1984), Rock (1986), McGuinness (1992), Lee, Taylor, and Walter (1999) and Lowry (2003)). Few studies, however, investigate the dynamic interrelationship between IPO volume and initial returns. This paper uses a simultaneous equations approach to study the endogenous interrelationship between IPO volume and initial return. We find that higher IPO volume causes higher initial returns, but not vice versa. Furthermore, lagged IPO volume is significantly negatively related to initial returns. In other words, the underpricing of a new issue is affected by not only the concurrent number of new issues at the mean time but also by the numbers of new issues in prior periods. Another purpose of our study is to test the hypothesis that technological innovation is the main driver behind hot issue markets. Welch (1989) and Hoffmann-Burchardi (2001) suggest that the clustering of new issues is caused by IPO volume spikes in industries that have recently experienced technological innovations or favorable productivity shocks. Through analysis of the industry correlation matrix of new issue activity and a fixed-effects model based on industry level data, we find evidence against the technological innovation hypothesis.