IPO performance in hot and cold market and role of interest rate

Abstract

The empirical study presented in this paper attempts to verify the propositions that the relationship between IPO underpricing and interest rate are linked to hot and cold markers. The propositions are derived from the theoretical model developed by the author. The rests were conducted on a sample of 531 IPOs issued in the US from 1988 through 1993. The rests examine the underpricing behavior and role of risk-free interest rate in both hot and cold markers. The study concludes that interest rate and percentage of underpriced issues in cold market is significantly higher than that in hot market. It is also concluded that higher interest rate stimulates a cold market and induces more underpriced lPOs.