IPO activity and market volatility

Date12 March 2018
DOIhttps://doi.org/10.1108/JEPP-D-17-00017
Published date12 March 2018
Pages2-13
AuthorMehmet F. Dicle,John Levendis
Subject MatterStrategy,Entrepreneurship,Business climate/policy
IPO activity and market volatility
Mehmet F. Dicle and John Levendis
College of Business, Loyola University New Orleans,
New Orleans, Louisiana, USA
Abstract
Purpose The purpose of this paper is to hypothesize two channels in which market volatility affects initial
public offering (IPO) activity.
Design/methodology/approach First, CEOs time the market for IPOs and volatility makes this decision
process harder. Second, risk-averse IPO investors become more reluctant toward IPOs during periods of
higher volatility for their after-IPO returns.
Findings The authors provide evidence that higher market volatility leads to lower IPO activity,
supporting these hypotheses. More importantly, the authors show that it is not the realized volatility, but
rather the implied (expected) volatility, that causes lower IPO activity.
Research limitations/implications While there may be many companies that are ready to have IPOs,
they may be simply waiting for a more opportune time which may not necessarily be a period of high prices
but of low volatility.
Practical implications The public policy prescription is clear: if IPOs are to be encouraged, then
regulatory policies should be constructed with the aim of reducing volatility.
Originality/value This study is the first (to the authorsknowledge) to argue that it is not the realized
volatility which most affects the IPO decisions of executives, entrepreneurs and investors.
Keywords IPO, Market timing, Volatility, Investor sentiment
Paper type Research paper
Nomenclature
Δdaily log difference
µmonthly average
tmonth
µ
ΔSP500
monthly average of daily S&P-500
index returns
σ
ΔSP500
monthly standard deviation of
daily S&P-500 index returns
µ
ΔVIX
monthly average of the daily
changes in the VIX index
ΔIPO monthly change in monthly total
IPO offer amount
Introduction
The initial public offering (IPO) decision is based on different dimensions[1]. The
entrepreneur needs to consider the financial situation of the company (by itself or in
comparison to other companies) (e.g. Lerner, 1994; Pagano et al., 1998), the overall
financial market and economic conditions (including investor sentiment or market
optimism) (e.g. Baker and Wurgler, 2000; Lowry, 2003) as well as his/her own investment
choices (e.g. Benninga et al., 2005). These considerations need to be based on current
market conditions as well as the expected situation.
Ideally, IPOs will take place when the shares can be sold at the highest possible price to
new shareholders with the lowest possible discounting. The literature is consumed with
research about the overall IPO decision and its long-term process. In this study, we do not
focus on the generalIPO decision. Instead, ourfocus is mainly on companies that have already
decided to have an IPO and are waiting for the right moment to launch. That is, we do not
focus on whether to have an IPO, but rather on when to have an IPO. Companies that are
going through an IPO usually have an actual IPO date set later in the process. This specific
IPO date depends on the market timing of the company executives and of the entrepreneur.
Journal of Entrepreneurship and
Public Policy
Vol. 7 No. 1, 2018
pp. 2-13
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-D-17-00017
Received 26 August 2017
Revised 6 September 2017
Accepted 6 September 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
2
JEPP
7,1

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