Firm-specific risk and IPO market cycles

Abstract

Chaire RBC en innovations financières. Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE). Département de finance, assurance et immobilier, Faculté des sciences de l'administration, Université Laval, Québec G1V 0A6, CanadaThis article characterizes the role of risk in the initial public offering (IPO) cycle. While most of the previous literature uses the volatility of IPO initial returns to measure risk, we focus on different risk measures, namely firmlevel systematic and idiosyncratic volatilities and the market-wide implied volatility index (VIX), to assess their role in the IPO cycle. Our results shed new light on (1) which risk measure is important in the determination of IPO cycles, (2) the temporal pattern of each risk component across issuing firms and (3) the relationship between market-wide uncertainty and IPO risk. Our findings reveal a lead-lag relationship between IPO waves, VIX and the IPO systematic risk measure. We also highlight the fact that marketlevel uncertainty predicts IPO activity and the level of idiosyncratic risk of the next-period-issuing firms. Issuing firms' systematic risk can only be predicted by the systematic risk of firms now proceeding to their offering. The main implication resulting from our study is that one can better anticipate 'hot-issue' markets, as well as the specific risk components of future new issues. This will help improve upon the regulatory environment, IPO investment decisions and IPO timing given market receptivity.

Cross-influence of Risk, Return, and Governance on Decision-Making in Hydropower Investments

“…Both external and internal risk factors positively correlate with the probability of firm failure, impacting investor confidence. Beaulieu and Bouden (2015) explore the implications of firm-specific risks on the IPO market cycle. They find that high levels of idiosyncratic risk may deter IPO candidates, resulting in low expected returns and reduced investor demand.…”

“…They find that high levels of idiosyncratic risk may deter IPO candidates, resulting in low expected returns and reduced investor demand. Idiosyncratic risk negatively impacts stock returns, subsequently reducing retail investor interest, a trend observed especially among younger and educated individuals (Beaulieu & Bouden, 2015;. Further insights into idiosyncratic risk come from Hur and Luma (2017), who observe a negative association between idiosyncratic volatility and unrealized stock gains.…”

Risk Management Strategy in IPO Activity

“…Based on the information above, it is evident that the macroeconomic factors present in the market significantly determine the risk level of IPOs. According to Beaulieu and Mrissa Bouden, businesses do not operate in isolation [25]. The authors establish that there are several factors that have a significant influence on the performance of the firm.…”