| In Essay 1, I disentangle the effect of correlated omitted variables, such as private valuation information, from the offer price revision of the investment bank. I find that the effect of a standard deviation change in the omitted variables on initial return is 14.06% in bubble, 3.63% in hot, and 3.17% in marginal-hot IPO markets. In contrast, I find the effect is neither statistically significant or economically meaningful in non-hot markets. Such evidence is inconsistent with book-building as a mechanism to extract private valuation information. In Essay 2, I develop a model to explain average positive IPO initial returns. In the model, the investment bank ex-ante prices the IPO while facing a downward sloping stochastic demand curve. Without relying upon information asymmetries between agents, the model predicts several empirical regularities: average positive initial returns, the ubiquitous use of the over-allotment option, partial adjustment of offer prices to observable information, and extreme initial returns in a bubble. |
