Dynamic relationships and technological innovation in hot and cold issue markets

Purpose – The puzzle of hot and cold issue markets has attracted substantial interest in the academic community. The behavior of IPO volume and initial returns over time is well documented. Few studies, however, investigate the dynamic interrelationship between these two variables. This paper aims to fill this gap. In addition, the technological innovations hypothesis of hot issue markets is tested. Welch and Hoffmann-Burchardi suggest that the clustering of new issues is caused by IPO volume spikes in industries that have recently experienced technological innovations or favorable productivity shocks. Design/methodology/approach – This paper employs a sample of 8,160 initial public offerings filed in the USA between January 1972 and December 2001. A simultaneous equation approach is used to examine the endogenous relationship between IPO volume and initial returns. In addition, the paper analyzes the industry correlation matrix of new issue activity and estimates a fixed-effects model based on industry-level data to examine the impact of technological innovations on new issue activity. Findings – It is found that higher IPO volume causes higher initial returns, but not vice versa. In addition, evidence is found against the technological innovations hypothesis. The findings suggest that economy-wide rather than industry-specific factors are responsible for the observed variations in IPO volume. Research limitations/implications – As with any empirical study, the results may be sample-specific. Originality/value – The paper extends the prior literature on the relationship between IPO volume and initial returns by applying two-stage and three-stage least squares models that go beyond prior methodological approaches used in the extant literature. In addition, the paper provides some of the first empirical evidence on the effect of technological innovations and productivity shocks on IPO activity.