| The problem. The bull market of the late 1990s experienced an unprecedented number of high tech initial public offerings (IPOs), and the tech-heavy NASDAQ market index soared. However, by the end of 2000 the tech bubble had burst, and many investors took huge losses. Evidence suggests that high tech firms that went public in the aftermath of the technology bubble experienced, on average, lower underpricing than counterparts that went public during the bubble. This study analyzed determinants of underpricing of technology firms that went public on the NASDAQ during and in the aftermath of the tech bubble.; Method. With the help of established theories such as the hot and cold issue market hypothesis and the ex-ante uncertainty theory, a model was developed to compare determinants of underpricing of over 200 U.S. technology firms to explain variations in IPO underpricing from January 1, 1998, through December 31, 2003.; Means, variances, and standard deviations of descriptive statistics and Student t tests investigated whether means of initial returns, age of the firm, number of employees, and number of tech IPOs differed between the hot (1998--2000) and cold (2001--2003) issue market periods.; A Pearson correlation test was used to identify direction and strength of relationships between the initial return and each of seven predictor variables (age of the firm, number of employees, stock market performance, number of IPOs, volume of shares, underwriter reputation, and share overhang). Only the variables with a significant relationship were employed in multiple regression analysis to assess the predicting power of variables regarding IPO underpricing.; Results. Results showed significant differences in mean underpricing, mean age of firms, mean number of employees, and mean quarterly number of IPOs between the hot and cold issue market periods. All variables except number of employees and volume of shares had a significant correlation with underpricing. The directions of the relationships supported the hot and cold issue market theory, the ex-ante uncertainty theory, and the signaling theory. The predictive model developed to forecast the IPO underpricing of a technology firm was significant at .001, explaining 38.4% of IPO underpricing of technology firms. |
