The Efficient IPO Market Hypothesis: Theory and Evidence

Abstract

We derive the optimal underwriting method and the quantitative initial public offering (IPO) pricing rule that this method implies in a market with informational frictions consisting of fully rational banks, issuers, and investors. In an efficient IPO market, an issuer’s expected initial return will be determined entirely by the combination of this pricing rule and issuer fundamentals. Applying this rule, we find that we can explain the quantitative magnitude of the principal aspects of the time-series and cross-sectional variation in IPO average initial returns. We conclude that the IPO market is efficient.

Disruptor Recognition and Market Value of Incumbent Firms: Airbnb and the Lodging Industry

“…An event study allows us to analyze fluctuations in the stock market so that we can ascertain the different estimations of firms’ values as the combined value of all firm stocks calculated by the stock market in response to a specific event. The evaluation, that is, the appreciation and depreciation of a firm’s market value, can be conducted on the basis of the previously explained efficient market hypothesis assumption, which is widely applied in finance literature (James & Valenzuela, 2020). Thus, a higher or lower valuation of a firm’s stock price as a result of an event indicates that the stock market has considered that event capable of increasing or decreasing a firm’s market value (Benner, 2007; James & Valenzuela, 2020; Jones et al, 2016).…”

“…The evaluation, that is, the appreciation and depreciation of a firm’s market value, can be conducted on the basis of the previously explained efficient market hypothesis assumption, which is widely applied in finance literature (James & Valenzuela, 2020). Thus, a higher or lower valuation of a firm’s stock price as a result of an event indicates that the stock market has considered that event capable of increasing or decreasing a firm’s market value (Benner, 2007; James & Valenzuela, 2020; Jones et al, 2016). This increase or decrease constitutes pressure to act.…”

“…Understanding different types of milestones is relevant as different types might require different responses and also solicit different effects on the market value of incumbent firms. This is because the stock market is assumed to work under a condition of efficiency (James & Valenzuela, 2020). Hence, the effect that a milestone will have in the future on firms' revenue will be discounted to assess the price in the current time (Benner, 2007).…”

Early and late-stage startup funding in hospitality: Effects on incumbents' market value

“…Specifically, we estimate the daily cumulative abnormal returns (CAR) as the market value of firms, followed by the analysis of the effect of startup funding rounds on incumbents' market value from 2011 to 2019. We do so as a firm's market value is affected by what its shareholders regard as a potential threat or a potential opportunity (James & Valenzuela, 2020). Furthermore, we analyzed the effects of resource similarity, market commonality, and a startup's investment stage in driving incumbents' market value.…”

“…According to this fundamental hypothesis, all relevant information is known by the stock market and stocks are priced accordingly (Jones, Reed, & Waller, 2016). Hence, a change in the market value of a firm, coinciding with a funding round, represents the long-term effect on that firm, discounted in relation to the investigated time and reflected in the market value (James & Valenzuela, 2020;Jones et al, 2016).…”