The Cyclical Behaviour of the IPO Market in Australia

Abstract

Initial public offerings have been examined typically in the context of short-term and long-run stock price performance of individual issues. In this paper, the aggregate market for IPOs is examined. There has been some prior suggestion that the IPO market exhibits cyclical patterns which are characterised by a high volume of new issues and substantial underpricing, such that 'hot issue periods' exist. This paper tests for the existence of such periods in the Australian market using a Markov regime-switching model on a variety of constructed IPO activity measures. The results demonstrate that hot periods do exist but that they do not possess homogeneous features. A number of distinguishing features are also identified between industrial and resource sector IPOs. Further, a lead-lag relationship is identified for the industrial sector such that underpricing leads IPO volume for up to six months. The paper offers explanations for these findings that appear related to general stock market conditions and regulatory features.