The Lack Of IPOS: Is It Surprising?
The Lack Of IPOS: Is It Surprising?
UNIVERSITY PARK, PA-The absence of IPOs following the attacks on the World Trade Center is due to the economic downturn, investor uncertainty, and possibly to investors being overly pessimistic regarding firms' values.
"My research on IPO cycles shows that economic slowdowns, decreases in investor optimism, and rising information asymmetry each result in fewer companies going public. A combination of the three is taking place now and that's why the IPO market is so cold," explains Michelle Lowry, assistant professor of finance in Penn State's Smeal College of Business. Lowry has completed several studies on "hot IPO markets" including one using a 37-year time series of U.S. IPO volume to investigate potential explanations.
Lowry notes that during economic expansions, economy-wide demand for capital is higher and more firms therefore go public. However, the economy was heading into a downturn prior to the September 11 attacks and this downturn has continued.
"Variation in IPO volume also is driven by changes in investor optimism. There is a joke that when investors get bearish, you can't go public. But when they go bullish, just about anyone can go public. Not surprisingly, investor optimism is not high at this point in time," says Lowry.
Investors' uncertainty regarding the true value of firms is another cause. In light of the recent World Trade Center attacks, there is considerable uncertainty over firm's future prospects and thus their true values.
"Any one of those factors could cause variations in the IPO market, but now all three of the factors are in effect and that's why the IPO market is so cold."
In her working paper, Why Does IPO Volume Fluctuate So Much?, Lowry
found that changes in firms' demands for capital and changes in the level
of investor optimism explain a substantial portion of the variation in
IPO volume. Variation in information asymmetry appears to be of secondary
importance. While prior research showed that investor sentiment affected
the number of companies going public, this paper indicates that it is
not the only relevant factor.
REPORTERS & EDITORS: For more information, please contact Wyatt DuBois in the Smeal College of Business Media Relations Office at 814-863-3798 or wed112@psu.edu.
Penn State's Smeal College of Business offers highly ranked undergraduate, MBA, executive MBA, Ph.D., and executive education opportunities to more than 5,500 students at all levels. Featuring academic departments of accounting, finance, marketing, insurance and real estate, management, and supply chain and information systems, the college is also home to major research centers such as the Center for Supply Chain Research, the Institute for the Study of Business Markets, the Center for Digital Transformation, the Farrell Center for Corporate Innovation and Entrepreneurship, the Center for Global Business Studies, and the Center for the Management of Technological and Organizational Change.
