| A great deal of research has shown that, on average, Initial Public Offerings have significant and positive initial excess returns. Until recently, most of the research on IPOs has been focussed on the setting of offer prices. In this thesis, I studied the aftermarket pricing and long-term aftermarket performance of IPOs.; Over periods of 5, 7, and 10 year periods, I found that I could not reject the hypothesis that, on average, the portfolio of IPOs performed as well as the S&P 500. However, reweighting the sample to capture differences in IPOs indicates that IPOs do underperform. Cross-sectional distributional tests and median tests also indicate that IPO performance may indeed differ from that of other companies, which in turn implies that aftermarket prices for IPOs may be set by a different process than that of other publicly traded companies.; Evidence from regression tests suggest that investors were not fully using all the information available to them when setting aftermarket IPO prices, and that investors were willing to pay more for IPOs issued under different market conditions. However, there is evidence that buyers were more accurately able to assess the value of IPOs when more information was available. When IPOs were roughly separated into "high information" and "low information" groups, the high information firms had a significantly lower variance of long-run returns than the low-information firms.; Since IPOs do not appear to follow standard pricing models, several other models were discussed. One model, based on a contingent claims characterization of IPOs, was detailed and tested. The results showed that the options model of IPO pricing was a significantly better predictor of aftermarket prices than a simple cash flow model. |
