Hot and Cold IPO Market: Evidence from Sweden

Sammanfattning: The Nordic Initial Public Offering (IPO) market is expected to set a new record in IPO activity in 2017. This IPO boom is mainly driven by high number of listings in the Swedish IPO market, which constituted 80% of all listings in the Nordic on average in the last two years. Due to increased importance of the Swedish IPO market it becomes essential to understand the trends in the market. This paper investigates the cyclicality of the Swedish IPO market from 1993 to 2016 with respect to the demand for capital and the adverse selection hypotheses. According to these theories, increased demand for capital leads to more firms going public, more bad firms pool creating adverse selection, hence there should be dispersion in firm quality between hot and cold periods in the IPO market. The results of the empirical analysis suggest that the Swedish IPO market similarly to US IPO market is driven by firms' demand for capital. By classifying the IPO market into cold and hot periods, the analysis show that there is dispersion in firm quality across hot and cold IPO markets in Sweden. Surprisingly, only when more extreme separation criteria is applied in the cold and hot period classification, the statistical significance of the relationship between heat degree and firm quality increases. This suggests that more extreme separation criteria are needed in the relatively colder IPO market in Sweden, compared to US. The findings also stress the importance of choice of heat measure, firm quality measure and especially the hot and cold period separation methodology.