Ipo pricinga maximum likelihood approach

Abstract

This paper analyses how IPO initial return volatility affects the valuation of firms that go public. The goal is to test whether the initial return volatility for evaluating the pricing of IPOs is relevant on the Spanish capital market, bearing in mind that the degree of ex-ante uncertainty regarding the value of the firm for IPOs in Spain is lower than in other countries, as is the level of underpricing. I also analyse how the main explanations found in the literature for the anomaly of underpricing are affected by this new metric of return volatility. Consistent with IPO theory, both the asymmetry of information hypothesis and the hot IPO market hypothesis are confirmed in this study. The results do not provide conclusive support for the signalling hypothesis for underpricing.