8 - IPO initial returns on European ‘new markets’

Abstract

This chapter analyzes a sample of 532 initial public offerings (IPOs), listed on European "new markets" up to December 2002. It shows that, in contrast to the evidence of main European exchanges, "new markets" attract young and high-technology firms. It shows that an average IPO on the "new markets" displays a 35.7% first-day return, which is about three times larger than the first-day return of a typical IPO on the main European stock exchanges. Investors seem to demand higher first-day returns to compensate them for the higher valuation uncertainty associated with risky deals. The higher first-day returns serve to reward investors for releasing their private information about IPO value in the premarket phase of the bookbuilding process The IPO deal flow is also inversely related to first-day returns. Companies that go public in a period of high IPO volume have lower first-day returns. In high IPO volume periods, the market power of underwriters may be stronger, reducing the need to compensate investors for the release of private information by means of high first-day returns. .