Summary

I .Article title and Authors

This article is from the journal of financial economics and is written by Michelle Lowry.The title of this article is “Why does IPO volume fluctuate so much?”

Smeal College of Business, Penn State University, University Park, PA 16802, USA

II motivation and relevant literature

The author in this paper is aiming at providing an explanation for the fluctuation in IPOs over time and the factors that trigger those fluctuations. He explains that phenomenon by saying that firm’s need of capital, the information asymmetry and the investor optimism/pessimism all play a major role in the issuing of those first stocks.

III Hypothesis

The author based their paper on three hypotheses.

The capital demand hypothesis which emphasizes that private company are likely to issue stocks when they need capital

The information asymmetry hypothesis: The lower number of IPOs during period of high uncertainty reflects the lemon problem. People are not going to buy if they do not have enough information about the company

The investor sentiment hypothesis: Investors are more likely to pay a lot of money to acquire stocks when they feel optimistic about the market.

They also believe that efficiency or inefficiency of the market is a good way to explain observed fluctuation in IPOs.

IV Data

The author analyses the fluctuation in IPO seven years before 1973 and then seven year after 1979. The author relies on the Securities Data Company (SDC) database for more detailed analysis. This database includes 9,163 firm-commitment IPOs between 1970 and 1996.

V results and conclusion

Results indicate that companies’ demand for capital and the level of investor sentiment explain a significant amount of the variation in IPO volume. Also the number of IPOs increases as adverse selection costs get lower. Companies time the market to take advantage of overvaluation caused by the optimism of investors.