Discussion Paper Details

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Title: Stock Prices and IPO Waves

Author(s): Lubo? Pástor and Pietro Veronesi

Publication Date: August 2003


Programme Area(s): Financial Economics

Abstract: We develop a model of stock valuation and optimal IPO timing when investment opportunities are time-varying. IPO waves in our model are caused by declines in expected returns, increases in expected profitability, or increases in prior uncertainty about average profitability. The model predicts that IPO waves are preceded by high market returns, followed by low market returns, and accompanied by high stock prices. These as well as other predictions are supported empirically. Stock prices at the peak of the recent ?bubble?, which was associated with an IPO wave, are consistent with plausible parameter values in our rational valuation model.

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Bibliographic Reference

Pástor, L and Veronesi, P. 2003. 'Stock Prices and IPO Waves'. London, Centre for Economic Policy Research.