Initial public offerings (IPOs) generate abnormally high returns immediately following their issuance. An examination of daily returns for 649 firms that went public between 1975 and 1982 reveals how these returns are distributed across time (from the day of issuance through the 190 aftermarket trading days); across initial offering price categories; and across types of offerings.
The sample’s mean return on the initial day was a statistically significant 21.65 per cent; the first day of aftermarket trading also experienced a significant positive abnormal return. The entire aftermarket period had a cumulative return of 17.99 per cent, suggesting that significant abnormal returns continued beyond the initial offering day.
While the initial day’s abnormal return was positive across all price groups, it was much greater for the IPOs originally priced at $1.00 or less than for any other group. The lowest priced IPOs also accounted for most of the sample’s abnormal returns over the aftermarket trading period.
The initial and aftermarket performances of firms using firm commitment offerings closely approximated the performances of the entire sample (as 88.4 per cent of the IPOs sampled used this form). The best efforts offerings, however, outperformed the firm commitment offerings both on the offering day and over the aftermarket trading period. These higher returns are attributable, again, to the returns on stocks priced at $1.00 or less; over 70 per cent of the best efforts offerings fell into this price category.< /p>