Hot Bull or Cold Bear? How Market Cycles Affect IPO Underpricing

Sammanfattning: IPO underpricing and its variability is highly cyclical and follows waves, with "hot" and "cold" IPO markets displaying radically different characteristics. Further, during the 21st century, the effect of bear-, and bull markets on stock prices increased. By adjusting IPO returns for market returns, proxied by the S&P 500, we find that during bear markets (i.e., "cold markets"), the underpricing of IPOs, the variability of initial IPO returns, and the number of firms listing is much lower compared to bull markets, with the effects being reduced when adjusting for same-period market returns. We also find that some of the effects can be attributed to adverse selection in the types of firms going public, with generally decreasing information asymmetry during bear markets. While IPOs in bear markets generally are underpriced, IPOs are overpriced on average in the current bear market in 2022, making the future of initial IPO returns uncertain.