Are hot markets driven by hot resource shares or hot commodities?

Cycles in initial public offer (IPO) underpricing have been historically linked to both the proportion and pricing of resource-based IPOs issued relative to the entire population of IPOs. In addition, IPOs in the less diversified resource sector are exposed to changes in underlying commodity market prices which directly affect firm valuation. However, prior IPO research has largely ignored the various risk factors affecting resource firms. In this paper, we explicitly consider the explanatory power of 'traditional' IPO risk factors and augment these with specific risk characteristics associated with the resource sector, such as the underlying changes in resource commodity prices, the nature of activities (exploration versus production), and the level of commodity diversification. IPO market cycles over the period March 1983 to January 1990 are identified using the switching regression technique of Goldfeld and Quandt (1972). The regression results suggest that for 'hot' markets, the level of underpricing is unrelated to any previously identified risk characteristics. Yet in 'cool' markets, both the underlying commodity price change, period of subscription, issue size and the proportion of resource to total listing are influential. Interestingly, the level of firm diversification and the nature of resource activity do not systematically affect the level of underpricing.