The Dynamic Relationship between Macroeconomic Factors and Underpricing: An Empirical Study of the U.S. IPO Market

Emil Sebastian Harberg & Peder Martin Schlegel Rasmussen

Student thesis: Master thesis


Initial Public Offerings, or simply IPOs, are fundamental in the reallocation of capital between actors in the financial markets. The listing day marks a historic event in any company’s lifetime and usually receives significant attention from multiple stakeholders. The offering price of an IPO is generally valuated at 15-20 percent lower than the first closing price, hence investors tend to profit from the money being left on the table by the issuing company. The price difference also denoted underpricing or first-day returns, have long probed questions by both researchers and practitioners, as these extraordinary returns should not be achievable in an efficient market. We seek to contribute to the academic sphere on IPOs by modeling how underpricing changes over time in correlation with transitions of the macroeconomic environment. Through the development of a statistically robust autoregressive regression model on U.S. IPOs from 2002 to 2017, we find that underpricing indeed varies according to the macroeconomic climate. More explicitly, we find that changes in financial market stress and liquidity risk, economic growth, stock returns, and long-term interest rates are all influential factors on average first-day returns. To test the predictive capability of the statistically significant variables on underpricing, we create two forecasts and find that macroeconomic indicators are highly useful in predicting IPO returns relative to a simple arithmetic average. To shed light on our suggestions for why the correlation exists between certain macroeconomic variables and the underpricing phenomenon, the paper presents four propositions for further research. These propositions are based upon contemporary research of uncertainty in IPO-pricing as well as investor sentiment theory, yet the propositions are only subject of the authors own interpretation and therefore not prone to any explicit testing. Naturally, the paper presents useful insights, not only for researchers but also for practitioners such as investors and issuers. Amongst others, we highlight that investors should be attentive to the macroeconomic environment and the state of the financial markets before investing in IPOs.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2019
Number of pages137
SupervisorsSøren Plesner