Helwege and Liang 2004

JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS VOL. 39, NO.
3, SEPTEMBER 2004
COPYRIGHT 2004, SCHOOL OF BUSINESS ADMINISTRATION, UNIVERSITY OF WASHINGTON, SEATTLE, WA 98195
Initial Public Offerings in Hot and Cold Markets

Jean Helwege and Nellie Liang
Abstract
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investor sentiment
I. Introduction
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A. Defining Hot and Cold IPO Markets
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FIGURE 1
Number of IPOs and Underpricing
Number of IPOs
Number
75
3-month moving average
60
45
30
15
0
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
IPO Underpricing
Percent
150
3-month moving average
125
100
75
50
25
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
The sample for number of IPOs consists of 6,419 firm-commitment, non-financial IPOs in the SDC database from 1975–
2000, except reverse LBOs, spinoffs, and IPOs offered at less than $1 a share. The solid line is the number of IPOs, and
the dashed line is the number of IPOs scaled by the sum of new business formations in the current and preceding four
years, from Dun and Bradstreet, (multiplied by the mean of the number of IPOs per month over the mean of the scaled
number of IPOs per month so that the monthly average of the two series is equal.) The sample for IPO underpricing
consists of first-day return data on 4,235 firms that were found on CRSP of the 5,480 non-unit IPOs in the sample.
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B. Benchmarking Stock Return Performance
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IV. Empirical Tests of Differences between Hot and Cold

IPOs
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A. Stock Price Performance of Hot and Cold IPOs
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TABLE 1
Long-Run Stock Returns (Wealth Relatives) for All IPOs 1975–2000
Volume Underpricing
Definition Definition
Year All Hot Cold Neutral Hot Cold Neutral
Panel A. Calendar Year Returns

All CRSP Firms
Value-weighted 1 0.888 0.793 1.154 0.971 0.877 0.910 0.883
3 0.839 0.760 1.345 0.895 0.917 0.815 0.821
5 0.910 0.948 1.382 0.799 0.772 1.310 0.769
Equal-weighted 1 0.888 0.813 1.115 0.946 0.847 0.911 0.898
3 0.888 0.850 1.236 0.893 0.990 0.851 0.869
5 0.962 1.029 1.228 0.835 0.811 1.383 0.815
NYSE Firms
Value-weighted 1 0.899 0.806 1.154 0.978 0.871 0.924 0.900
3 0.893 0.829 1.338 0.927 0.987 0.861 0.873
5 0.981 1.033 1.388 0.855 0.829 1.411 0.829
Equal-weighted 1 0.929 0.860 1.119 0.983 0.876 0.955 0.945
3 1.010 1.001 1.233 0.987 1.132 0.960 0.988
5 1.139 1.253 1.245 0.976 0.954 1.630 0.968
Nasdaq Firms
Value-weighted 1 0.904 0.851 1.081 0.939 0.926 0.906 0.891
3 0.811 0.721 1.238 0.897 0.862 0.792 0.800
5 0.906 0.961 1.282 0.783 0.778 1.279 0.769
Equal-weighted 1 0.964 0.935 1.034 0.984 0.936 0.973 0.973
3 0.997 1.015 1.108 0.957 1.094 0.947 0.984
5 1.137 1.301 1.116 0.948 0.954 1.606 0.973
Panel B. Anniversary Date Returns
Nasdaq Firms
Value-weighted 1 0.930 0.905 1.081 0.939 0.932 0.911 0.938
3 0.802 0.710 1.156 0.891 0.865 0.796 0.781
5 0.803 0.753 1.270 0.805 0.777 0.859 0.786
Equal-weighted 1 0.946 0.952 1.021 0.931 0.915 0.936 0.968
3 0.942 0.936 1.021 0.937 1.039 0.919 0.916
5 0.972 0.996 1.078 0.923 0.948 1.027 0.953
The sample consists of all nonfinancial firm IPOs in the SDC database from 1975–2000, except reverse LBOs, unit offer-
ings, spinoffs, IPOs offered at less than $1 a share, IPO firms that were not listed on Compustat or CRSP, and IPO firms
that did not have complete trading data on CRSP at the time of the IPO (traded less than 11 days, had a four-day or longer
gap in trading during the first year after the IPO, or trading data began more than two weeks after or more than three
days before the SDC IPO date). Wealth relatives for the firms in the sample are constructed by comparing average raw
returns on the IPOs to the average return on the an equal number of benchmark observations for the same time period
as each IPO trades. Calendar year returns for year i are returns from the time of the IPO until December 31 of the i th
full year after the IPO. Benchmarks are either equal-weighted or valued-weighted indices. Hot IPOs are all IPOs in the
sample that were completed in the top quartile of the issuance distribution (defined by three-month moving averages of
monthly counts of IPOs scaled by number of new business formations); cold IPOs were completed in the months that
constituted the bottom third in the moving average counts; neutral months are neither hot nor cold. Hot underpricing IPOs
are those in the top quartile of the underpricing distribution; cold underpricing IPOs are those in the bottom quartile of the
underpricing distribution; the remainder are neutral. Figures in italic indicate that bootstrapped skewness-adjusted t -tests
of the average excess returns (IPO buy and hold return less the benchmark) are significant at the 10% or lower level.
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B. Industry Clustering
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FIGURE 2
IPOs by Industry (1975–2000)
Percent
25
Hot Market
* Cold Market
20
15
*
* 10
* * 5
0
SIC 73 SIC 36 SIC 52-59 SIC 38 SIC 35 SIC 28 SIC 50-51 SIC 48 SIC 80 SIC 87 SIC 13
The sample consists of 6,419 firm-commitment, nonfinancial IPOs from 1975–2000, except reverse LBOs, spinoffs, and
IPOs offered at less than $1 a share. SIC codes are from the Directory of Companies Required to File Annual Reports with
the SEC when there is disagreement between CRSP and Compustat on the SIC code.
*Significantly different at 95% confidence interval. The industries shown account for 79% of IPOs in hot markets and 76%
of IPOs in cold markets.
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TABLE 2
Percent of IPOs by Industry, by Individual Hot and Cold Periods
Cold Hot
2-
Digit 1/75 2/82 11/87 8/88 1/90 9/90 9/98 11/00 3/81 4/83 5/86 5/87 2/92 6/93 5/95 6/97 6/99
SIC 5/80 10/82 4/88 4/89 3/90 3/91 12/98 12/00 7/81 1/84 12/86 9/87 4/92 6/94 1/97 11/97 11/99
73 9 21 0 14 4 6 50 0 6 20 17 12 10 12 26 19 52
36 13 18 13 4 12 9 4 15 11 16 8 11 7 9 8 7 10
52–59 5 9 3 5 4 9 8 5 4 14 13 8 11 10 7 8 6
38 10 14 15 4 12 15 0 25 11 11 6 8 12 4 9 9 1
35 17 7 5 13 16 9 0 0 14 7 6 9 7 7 6 6 4
28 3 2 8 8 16 12 4 5 2 4 9 8 16 7 7 6 2
50–51 5 4 13 6 4 9 8 0 5 4 4 6 6 8 5 6 3
48 1 4 5 5 0 0 8 5 0 3 5 4 1 5 5 4 12
80 1 5 0 4 8 9 0 15 3 5 5 3 12 4 4 2 0
87 1 2 3 4 4 3 0 5 5 1 1 2 2 2 3 7 2
13 10 0 0 1 0 6 0 5 19 0 0 2 0 2 1 2 0
Other 25 14 38 33 20 15 17 20 21 14 28 28 16 31 19 25 7
The sample consists of all nonfinancial firm IPOs in the SDC database from 1975–2000, except reverse LBOs, spinoffs,
IPOs offered at less than $1 a share. Hot IPOs include 3,159 firms that completed IPOs in periods of high issuance volume
(defined by three-month moving averages of monthly counts of IPOs scaled by new business formations); neutral period
IPOs total 2,831 in the sample; the remaining 429 cold IPOs were completed in the months that constituted the bottom
third in the moving average counts.
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C. Firm Characteristics in the Year of the IPO
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FIGURE 3
Hot IPO Markets Defined by SIC and Hot and Cold Markets by Number
Cold Market by Number
Hot Market by Number
Hot Market by SIC
SIC 80
SIC 48
SIC 50-51
SIC 28
SIC 35
SIC 38
SIC 52-59
SIC 36
SIC 73
Hot and Cold

Markets by
Number
1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
The sample consists of 6,419 firm-commitment, nonfinancial IPOs from 1975–2000, except reverse LBOs, spinoffs,and
IPOs offered at less than $1 a share. Hot and cold markets by number are based on the top quartile and lower third,
respectively, of three-month centered moving averages of the number of IPOs for each month scaled by the sum of new
business formations in the current and preceding four years, from Dun and Bradstreet. Hot markets by SIC are defined for
each 2-digit SIC industry; based on the top quartile of three-month centered moving averages of the number of IPOs in
each SIC category scaled by the sum of new business formations in the current and preceding four years, from Dun and
Bradstreet. SIC 73 has 1294 IPOs, SIC 36 has 650 IPOs, and SICs 52–59 have 558 IPOs. SICs 38, 35, and 28 each have
between 428 and 475 IPOs. SICs 50–51 have 319 IPOs, SIC 48 has 283 IPOs, and SIC 80 has 259 IPOs.
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TABLE 3
IPO and Firm Characteristics at time of IPO for Hot and Cold Market IPOs from 1975–2000
Adjusted Firm Characteristics
Markets by No. Markets by SIC Markets by No. Markets by SIC
Hot Cold Hot Cold Hot Cold Hot Cold
IPO Characteristics
SIC cluster 0.92** 1.07 0.90 0.97
Mean first-day return 21.9 21.1 29.7 27.1
IPO amount ($million, year 2000) 49.7* 42.1 51.0* 43.3
IPO amount-to-capital expenditures 8.9** 3.5 10.5** 5.2
Industry market-to-book 1.6** 1.3 1.8** 1.3
Industry long-term expected earnings 20.0** 15.0 22.5** 20.0
growth rate
Firm Financial Characteristics
Market-to-book 2.5* 2.3 2.8* 2.4 0.91 0.93 1.02 0.87
Long-term expected earnings growtha 30.0 28.0 35.0 30.0 8.0** 14.3 10.4 15.0
Operating income-to-assets 9.9** 14.8 5.8** 12.1 0.1 2.8 1.7* 4.0
Capital expenditures-to-assets 5.1** 8.7 4.9* 6.9 0.9** 3.6 0.7* 2.3
Debt-to-assets 4.8 7.7 2.8 7.9 9.3** 13.4 9.1 13.0
R&D-to-assets 0.4** 3.2 3.7 5.7 0.0** 1.4 0.7 1.5
Fixed assets-to-assets 12.1** 17.1 9.6** 16.8 5.7 5.1 5.8 4.3
Assets ($million, year 2000) 108.0** 169.5 106.9 148.4 5.4 4.9 22.8 40.1
Sales ($million, year 2000) 79.9** 154.1 62.7** 132.9 24.8 37.7 14.8 13.1
Other Firm Characteristics
Percent with negative earnings (mean) 40.1 35.2 49.3* 35.7
Discretionary accruals-to-assets 5.3 4.2 7.7* 1.9
Firm age (years) 7 7 7 6
Institutional ownership 15.0** 11.5 15.2 14.8
Percent with venture capital (mean) 43.9 46.0 53.6 51.4
that did not have complete trading data on CRSP at the time of the IPO. Hot IPOs defined by number include 1,878 firms
that completed IPOs in periods of high issuance volume (defined by three-month moving averages of monthly counts of
IPOs scaled by new business formations); neutral period IPOs total 1,644 in the sample; the remaining 176 cold IPOs
were completed in the months that constituted the bottom third in the moving average counts. Hot IPOs defined by SIC
include 1,700 that completed IPOs in periods of high issuance volume for nine most frequent SIC Industries, and cold
IPOs by SIC include 70 IPOs in the nine most frequent SIC categories. Firm financial characteristics are from Compustat
and are year-end data for the IPO year (see text for details). Adjusted firm characteristics are the median of values for
the IPO less the median for the industry, defined by the same 2-digit SIC category, excluding other IPOs in the same year
and the previous five years. ** and * represent that hot market characteristics are significantly different from cold market
characteristics at 99% and 95%, respectively, where hot market by number is compared to cold market by number, and
hot market by SIC is compared to cold market by SIC. All variables are median values except as denoted.
a
Data available for only 1,166 hot market and 63 cold market IPOs by number, and 1,068 hot and 34 cold market IPOs by
SIC.
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D. Characteristics of IPO Firms in Years Subsequent to the IPO
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*)' ,(-1$# %.7$)8#, 345, &"'*);" GHHH (.8 *1#'(&%.; 1#'+*'-(.7# 8(&( &"'*);"
GHHH: 2# %.7$)8# *.$/ &"*,# !'-, %. &"%, (.($/,%, %+ &"#/ 7*)$8 "(A# #0%,&#8 +*'
)1 &* *.#: &"'##: *' !A# /#(', (+&#' &"# 3459
!(<$# O ,"*2, -#8%(., *+ (8j),&#8 *1#'(&%.; -#(,)'#, %. &"# /#(', (+&#' &"#
3459 R%&&$# *+ &"# #A%8#.7# %. &"# &(<$# ,);;#,&, &"(& "*& -('6#& 345 !'-, ('#
<#&&#' *' 2*',# &"(. 7*$8 -('6#& 345,9 V, %. &"# /#(' *+ &"# 345: "*& -('6#& 345,
"(A# $*2#' 1'*!&, &"(. 7*$8 -('6#& 345, %. #A#'/ /#(' +*$$*2%.; &"# 345: <)& &"#
8%++#'#.7#, ('# .*& ,%;.%!7(.& <#&2##. "*& (.8 7*$8 345, <(,#8 *. .)-<#'9 Q*'
&"# -*'# ,#$#7& ,#& *+ !'-, <(,#8 *. 345, %. &"# .%.# 8*-%.(.& %.8),&'%#,: 8%+>
BD d\ *2.#',"%1 ,&(6#, ('# &/1%7($$/ 7$*,# &* EHr (& &"# &%-# *+ &"# 345 JQ#..: R%(.;: (.8 4'*2,#
JBCCNKK9 @# ($,* 8* .*& 6.*2 -(.(;#-#.& *2.#',"%19 R#'.#' JBCCOK ,"*2, &"(& &"# #=)%&/ ,&(6#
'#&(%.#8 </ -(.(;#', (.8 #-1$*/##, (+&#' &"# 345 %, Dr %+ &"# A#.&)'# 7(1%&($%,& %, *$8#': (.8 -*'#
1'#,&%;%*),: (.8 BGr %+ &"# A#.&)'# 7(1%&($%,& %, $#,, 1'#,&%;%*),9 ]*'# 1'#,&%;%*), d\, <'%.; &"#%'
!'-, 1)<$%7 %. "*& -('6#&,: ,* "*& -('6#& !'-, 2%&" d\ <(76%.; -(/ "(A# $*2#' %.,%8#' *2.#',"%1:
(.8 ($$ #$,# #=)($: ( $(';#' '#&(%$ <(,#9
+#'#.7#, ('# -*'# ,%;.%!7(.&: ,);;#,&%.; 2*',# 1#'+*'-(.7# </ "*& -('6#& 345,9
5)' #A%8#.7# ($,* ,);;#,&, 1'*!& '(&%*, &#.8 &* +($$ +'*- 345 $#A#$,: ,)11*'&%.;
&"# '#,)$&, %. L(%. (.8 _%.% JBCCOK (.8 ]%66#$,*.: 4('&7": (.8 ["(" JBCCDK: ($>
&"*);" -*,& ('# .*& ,%;.%!7(.&$/ 2*',# &"(. &"# %.8),&'/ -#8%(.9 5)' '#,)$&, (88
&* &"#%' !.8%.;, </ ,"*2%.; &"(& &"#'# %, $%&&$# 8%++#'#.7# %. &"# 2#(6#' 1#'+*'>
-(.7# <#&2##. "*& (.8 7*$8 !'-,9
TABLE 4
Firm Characteristics in Years following the IPO for Hot and Cold Market IPOs
Year After IPO
Year 1 Year 3 Year 5
Industry-Adjusted Medians (%)

Oper. Inc.-to-Assets
Hot by no. 0.6 0.6 0.8
Cold by no. 2.3 0.8 0.9
Hot by SIC 1.8++ * 1.4++ 2.3++ *
Cold by SIC 3.8 1.0 0.9
Cap. Exp.-to-Assets
Hot by no. 2.2++ ** 0.7++ ** 0.4+ **
Cold by no. 4.9++ 2.2++ 2.1++
Hot by SIC 1.9++ * 0.5++ 0.5+ **
Cold by SIC 4.1++ 1.7+ 2.9++
Assets
Hot by no. 16.3++ 18.4++ 5.2
Cold by no. 5.7 8.0 26.3
Hot by SIC 32.4++ 26.6++ 12.4*
Cold by SIC 85.6++ 76.5+ 57.9+
Sales Growth
Hot by no. 28.5++ 9.1++ 3.8++
Cold by no. 25.9++ 8.4++ 8.4++
Hot by SIC 32.9++ 9.8++ 4.7++ *
Cold by SIC 27.8++ 21.0+ 12.9++
that did not have complete trading data on CRSP at the time of the IPO. Year 1 sample includes IPOs before 2000, year
3 sample includes IPOs before 1998, and year 5 sample includes IPOs before 1996. Year values include firms that fail
or are acquired and used the value for the last year the firm is in the sample. Industry-adjusted assets is the median of
the difference between firm assets and the median assets for firms in its industry, defined by 2-digit SIC, excluding other
IPOs in the same year and previous five years, as a percent of median assets for firms in its industry. Industry-adjusted
operating income, capital expenditures, and sales growth are the difference between the firm value and the median value
for firms in its industry. Operating income is operating income before depreciation, as defined on COMPUSTAT research
tapes.
* and ** denote values are significantly different for hot and cold IPOs at 95% and 99%, respectively; + and ++ denote
values are significantly different from zero at 95% and 99%, respectively.
3.8),&'/>(8j),&#8 (,,#&, ,"*2 &"(& "*& (.8 7*$8 -('6#& 345 !'-, 8* .*&
8%++#' ,%;.%!7(.&$/ %. ,%W# +*' )1 &* !A# /#(', (+&#' &"# 345: &"*);" &"#/ ('# ,%;>
.%!7(.&$/ $(';#' &"(. &"# %.8),&'/ -#8%(. %. &"# !',& +#2 /#(',9 !"# '#$(&%A#$/
$(';#' ,%W# $%6#$/ *2#, &* &"# '#$(&%A#$/ ,&'*.; ,($#, ;'*2&" '(&#, *+ 345 !'-,9 V$>
&"*);" %.8),&'/>(8j),&#8 ,($#, ;'*2&" 8*#, .*& 8%++#' <#&2##. "*& (.8 7*$8 345,:
<*&" ,#&, *+ !'-, 7$#('$/ ;'*2 -*'# =)%76$/ &"(. &"#%' %.8),&'/ 7*).&#'1('&, %.
&"# /#(', (+&#' &"# 3459
!"# *.$/ ,)<,&(.&%A# 8%++#'#.7# <#&2##. "*& (.8 7*$8 -('6#& 345, %. &"#
/#(', (+&#' ;*%.; 1)<$%7 (11#(', &* <# %. 7(1%&($ #01#.8%&)'# %.&#.,%&/i"*& -('>
6#& 345, "(A# ,%;.%!7(.&$/ $*2#' %.8),&'/>(8j),&#8 7(1%&($ #01#.8%&)'# '(&%*, &"(.
7*$8 -('6#& 345,9 !"# $*2#' 7(1%&($ #01#.8%&)'#, *+ "*& -('6#& 345, %, .*& 7*.>
,%,&#.& 2%&" &"# A%#2 &"(& &"#/ "(A# ;'#(&#' %.A#,&-#.& *11*'&).%&%#, %. &"# /#(',
%--#8%(&#$/ (+&#' &"# 3459 ^*' %, %& 7*.,%,&#.& 2%&" &"# %8#( &"(& 345, %. "*&
-('6#&, 2#'# -*'# $%6#$/ &* ;* 1)<$%7 (& (. #('$%#' ,&(;# %. &"#%' $%+#>7/7$#9
E. Multivariate Logit of the Decision to Issue in a Hot or Cold Market
[* +(' 2# "(A# 7*.,%8#'#8 #(7" *+ &"# A('%*), +(7&*', %. %,*$(&%*.9 ^#0&: 2#

#,&%-(&# ( -)$&%A('%(&# $*;%& *+ &"# 1'*<(<%$%&/ *+ 8*%.; (. 345 %. ( "*& -('6#& A,9
( 7*$8 -('6#&: 7*.8%&%*.($ *. "(A%.; 8*.# (. 3459 !"# 8#!.%&%*. *+ ( "*& -('6#&
%, <(,#8 *. &"# &*&($ .)-<#' *+ 345, 7*-1$#&#89 M#,)$&, *<&(%.#8 2"#. 8#!.%.;
( "*& -('6#& <(,#8 *. %.8),&'/>,1#7%!7 A*$)-# J.*& ,"*2.K ('# A#'/ ,%-%$('9
!"# -)$&%A('%(&# '#,)$&,: 1'#,#.&#8 %. !(<$# E: $(';#$/ 7*.!'- &"# ).%A('%(&#
!.8%.;,9 !"# 7*#+!7%#.& *. &"# [3\ 7$),&#' A('%(<$# %, .#;(&%A# %. ($$ *+ &"# ,1#7%>
!7(&%*.,: %.8%7(&%.; &"(& %.8),&'/ 7$),&#'%.; %, ;'#(&#' %. 7*$8 -('6#&,9 V, ($'#(8/
8%,7),,#8: &"%, '#,)$& %, (& *88, 2%&" -(./ *+ &"# ;*%.; 1)<$%7 -*8#$,: 2"%7" *+&#.
1'#8%7& %.8),&'/ 7$),&#'%.; %. "*& -('6#&,9
TABLE 5
Probability of Hot Market IPO Defined by Number of IPOs
IPO amount 0.03 0.04 0.01 0.00 0.16 0.07

SIC cluster 1.59** 1.49** 1.48** 2.44** 2.25** 0.80*
Firm market-to-book 0.06** 0.05** 0.06** 0.03 0.06
Industry market-to-book 2.30** 2.24** 1.65** 1.49** 4.91**
Firm long-term expected earnings growth 0.01*
Industry long-term expected earnings growth 0.14**
Industry-adjusted
Assets 0.00 0.00 0.00 0.00 0.00
Operating income-to-assets 0.02 0.55 0.11 0.47 0.29
Capital expenditures-to-assets 2.66** 2.94* 3.13* 3.99** 1.62
R&D-to-assets 0.65 1.07 1.99 1.08 1.90
Fixed assets-to-assets 0.83 1.32 1.89 1.70 0.36
Negative earnings 0.08 0.17 0.23 0.02 0.49
Discretionary accruals-to-assets 0.01 0.04
Firm age 0.01 0.01
Institutional ownership 0.83
Venture capital 0.79**
Industry-adjusted
Operating income-to-assets, year 3 0.19
Capital expenditures-to-assets, year 3 0.99
No. of observations 1,978 1,936 1,488 1,267 1,047 1,247
Values are coefficients from a logit estimation of a hot or cold market IPO defined by number of IPOs. The sample consists
of all nonfinancial firm IPOs in the SDC database from 1975–2000, except reverse LBOs, unit offerings, spinoffs, IPOs
offered at less than $1 a share, IPO firms that were not listed on Compustat or CRSP, and IPO firms that did not have
complete trading data on CRSP at the time of the IPO. Hot IPOs defined by number include 1,878 firms that completed
IPOs in periods of high issuance volume (defined by three-month moving averages of monthly counts of IPOs scaled by
new business formations); 176 cold IPOs were completed in the months that constituted the bottom third in the moving
average counts. Firm financial characteristics are from Compustat and are year-end data for the IPO year (see text for
details). Adjusted firm characteristics are the median of values for the IPO less the median for the industry, defined by the
same 2-digit SIC category, excluding other IPOs in the same year and the previous five years. Industry dummy variables
are included in all specifications. ** and * represent coefficients are significant at 99% and 95%, respectively.
\*.,%,&#.& 2%&" &"# ).%A('%(&# '#,)$&,: &"# 7*#+!7%#.& *. &"# %.8),&'/ -('6#&>
&*><**6 '(&%* %, ,%;.%!7(.& (.8 1*,%&%A# %. ($$ &"# ,1#7%!7(&%*., 1'#,#.&#8 J%.8%>
7(&%.; &"(& "%;" ]qI *77)', 2%&" "*& -('6#& 345,K9 P*2#A#': &"# 7*#+!7%#.&
*. !'- -('6#&>&*><**6 '(&%* %, .#;(&%A#: &"*);" -)7" ,-($$#' (.8 %& <#7*-#,
%.,%;.%!7(.& %. ,*-# ,1#7%!7(&%*.,9 U,%.; (.($/,&,? -#(,)'#, *+ &"# !'-?, $*.;>
&#'- #('.%.;, ;'*2&" %.,&#(8 *+ !'- -('6#&>&*><**6: 7*$)-. E: $#(8, &* ( ,%-%$('
!.8%.;: (, &"# 7*#+!7%#.& *. %.8),&'/ $*.;>&#'- #('.%.;, ;'*2&" %, 1*,%&%A# (.8

,%;.%!7(.&: (.8 &"# 7*#+!7%#.& *. !'- $*.;>&#'- #('.%.;, ;'*2&" %, .*& ,%;.%+>
%7(.&9 !"),: "*& -('6#& 345, *77)' %. 1#'%*8, 2"#. ;'*2&" 1'*,1#7&, +*' &"#
%.8),&'/ ('# "%;": <)& &"*,# +*' &"# "*& 345, ('# .*& #,1#7%($$/ ;'#(&#'9
M#,)$&, +*' !'- *1#'(&%.; 1#'+*'-(.7# A('%(<$#, ('# ($,* 7*.,%,&#.& 2%&" ).%>
A('%(&# '#,)$&,9 \*#+!7%#.&, *. %.8),&'/>(8j),&#8 7(1%&($ #01#.8%&)'#, ('# .#;(&%A#
(.8 ,%;.%!7(.& %. .#('$/ ($$ *+ &"# ,1#7%!7(&%*., J#07#1& 2"#. 7(1%&($ #01#.8%&)'#,
%. /#(' &"'## ('# ($,* %.7$)8#8K: ,);;#,&%.; $#,, %.A#,&-#.& ,1#.8%.; </ "*& -('>
6#& 345,9 \*#+!7%#.&, *. %.8),&'/>(8j),&#8 MnT ('# ($,* 7*.,%,&#.&$/ .#;(&%A#:
&"*);" .*& ,%;.%!7(.&9 !"#,# '#,)$&, ,);;#,& &"(& "*& -('6#& !'-, "(A# $#,, .##8
+*' #0&#'.($ !.(.7%.;9 ^#A#'&"#$#,,: &"#/ (11#(' &* '(%,# &"# ,(-# (-*).& *+
-*.#/ %. &"# 345: 2"%7" 7*)$8 %.8%7(&# ( ;'#(&#' 2%$$%.;.#,, *+ %.A#,&*', &* "(.8
*A#' +).8, %. ( "*& -('6#&9 V.8: (, <#+*'#: 2# !.8 .* ,)11*'& +*' &"# "/1*&"#,%,
&"(& "*& -('6#& 345, '#1'#,#.& !'-, &"(& 2(.& &* '#8)7# #07#,,%A# -*.%&*'%.;9 3.
1('&%7)$(': 2"%$# .*& ,%;.%!7(.&: 7*#+!7%#.&, %.8%7(&# &"(& "*& -('6#& !'-, "(A#
( "%;"#' +'(7&%*. *+ ,"('#, %. &"# "(.8, *+ %.,&%&)&%*.($ *2.#', %--#8%(&#$/ +*$>
$*2%.; &"# 3459 ^*' 8*#, &"%, '#,)$& ,)11*'& &"# %8#( &"(& &"# 345 "#$1, (7=)%'#
( 8%,1#',#8 ,"('#"*$8#' <(,#9 3. (88%&%*.: %. 7*.&'(,& &* &"# ).%A('%(&# '#,)$&,:
"*& -('6#& !'-, ('# $#,, $%6#$/ &* "(A# "(8 A#.&)'# 7(1%&($%,&,: ,);;#,&%.; $#,,
*2.#',"%1 </ *)&,%8# %.A#,&*', <#+*'# ;*%.; 1)<$%79
@"#. 2# (88 !'- $*.;>&#'- 1#'+*'-(.7# A('%(<$#,: 2# ,&%$$ !.8 .* #A%8#.7#
&"(& "*& -('6#& !'-, )$&%-(&#$/ '#A#($ &"#-,#$A#, &* <# *+ "%;"#' =)($%&/9 V, 2#
8%8 +*' !(<$# O: &* (88 &"#,# A('%(<$#,: 2# 8* .*& %.7$)8# !'-, %+ &"#/ 7*)$8 .*&
"(A# #0%,&#8 +*' &"'## /#(', (+&#' &"# 345 (, *+ /#(' GHHH9BN V, ,"*2. %. 7*$)-.
b: .#%&"#' (8j),&#8 *1#'(&%.; %.7*-#>&*>(,,#&, .*' 7(1%&($ #01#.8%&)'#,>&*>(,,#&,
%. /#(' &"'## (+&#' &"# 345 ('# ,%;.%!7(.& %. &"# $*;%& '#;'#,,%*. J.*' ('# (,,#&, *'
,($#, ;'*2&": .*& ,"*2.K9 !"# %.,%;.%!7(.& 7*#+!7%#.& *. 7(1%&($ #01#.8%&)'#, %.
/#(' &"'## (+&#' &"# 345 $%6#$/ '#"#7&, -)$&%7*$$%.#('%&/ 2%&" 7(1%&($ ,1#.8%.; %.
&"# /#(' *+ &"# 3459 !"#,# '#,)$&, ,);;#,& &"(& &"#*'%#, <(,#8 *. 7"(.;#, %. (,/->
-#&'%7 %.+*'-(&%*. 7*,&, 7(..*& #01$(%. &"# <)$6 *+ &"# A('%(&%*. %. 345 A*$)-#
(7'*,, &%-#9
5A#'($$: &"# #A%8#.7# +'*- !'- 7"('(7&#'%,&%7, (& &"# &%-# *+ &"# 345 (.8 1#'>
+*'-(.7# %. &"# /#(', +*$$*2%.; &"# 345 7*.&'(8%7&, &"# %8#( &"(& "*& -('6#& !'-,
('# ( ,1#7%($ &/1# *+ 345 !'- %. ,1#7%($ &/1#, *+ <),%.#,,#,9 ^*.#&"#$#,,: 2"%$#
&"# '#,)$&, 8* .*& ,)11*'& ,&'*.;$/ (./ *+ &"# &"#*'#&%7($ ;*%.; 1)<$%7 -*8#$,: &"#/
8* .*& ,);;#,& &"(& &"# %''(&%*.($ -('6#&, A%#2 ,&#--%.; +'*- &"# ).8#'1#'+*'>
-(.7# $%&#'(&)'# %, *. &(';#&9 [&)8%#, *+ $*.;>&#'- 1#'+*'-(.7# ,);;#,& &"(& "*&
-('6#& 345,: 2"%7" *. (A#'(;# "(A# 2*',# ,&*76 1#'+*'-(.7#: ,"*)$8 <# ,-($$#':
"(A# +#2#' %.,&%&)&%*.($ *2.#',: -*'# 8%,7'#&%*.('/ (77')($,: *' "%;"#' (.($/,&,?
#('.%.;, ;'*2&" '(&#,: <)& &"#,# 7"('(7&#'%W(&%*., ('# .*& #A%8#.& %. *)' 8(&(9 !"#
#A%8#.7# %,: "*2#A#': 7*.,%,&#.& 2%&" &"# %8#( &"(& "*& -('6#&, ('# 8'%A#. </ +(A*'>
(<$# -('6#& 7*.8%&%*.,9 @# ,"*2 &"(& "*& 345, ('# !'-, %. %.8),&'%#, 2%&" "%;"
-('6#&>&*><**6 (.8 "%;" +*'#7(,&, +*' $*.;>&#'- #('.%.;, ;'*2&": #A#. &"*);"
&"#/ "(A# $*2#' 7(1%&($ #01#.8%&)'#,9 !"#,# 7*.8%&%*., 7*)$8 '#"#7& %.A#,&*' %''(>
BN @# ,"*2 -#(,)'#, +*' /#(' &"'## (+&#' &"# 345 &* 1'#,#'A# &"# ,(-1$# ,%W# (, *.$/ 345, 7*-1$#&#8
<#+*'# BCCb 2*)$8 <# '#1'#,#.&#8 %. '#;'#,,%*., ),%.; 1#'+*'-(.7# -#(,)'#, %. /#(' !A#9
&%*.($%&/: (, %. Rj).;=A%,& #& ($9 J+*'&"7*-%.;K: *' &"# '(&%*.($ %.A#,&*', -*8#$#8
%. 4(,&*' (.8 d#'*.#,% J+*'&"7*-%.;K9
F. Multivariate Analysis of Whether the IPO Will Experience High or Low

Initial Returns
[* +(' %. *)' 8%,7),,%*. *+ "*2 "*& (.8 7*$8 345, 8%++#': 2# "(A# +*7),#8
*. &"# ,(-1$#, &"(& 8#!.# "*& (.8 7*$8 </ &"# .)-<#' *+ 345,9 V.*&"#' 8%-#.>
,%*. ($*.; 2"%7" 345, -(/ 8%++#' ,"('1$/ %, &"# (-*).& *+ ).8#'1'%7%.; JM%&&#'
JBCNOKK9 3. &"%, ,#7&%*.: 2# 1'#,#.& &"# #,&%-(&#, *+ $*;%& #=)(&%*., 2"#'# "*& (.8
7*$8 345, ('# 8#!.#8 </ &"#%' %.%&%($ '#&)'.,9
!"# '#,)$&, *+ &"#,# #,&%-(&%*., J!(<$# bK ('# -*'# %. $%.# 2%&" &"# ,&/$%W#8
+(7&, (<*)& "*& 345,9 V, #01#7&#8: "%;" ).8#'1'%7%.; !'-, '(%,# -*'# +).8,:
&"*);" &"# 7*#+!7%#.& *. 345 (-*).& %, %.,%;.%!7(.& %. &"# '#;'#,,%*. 2"#. &"#
,(-1$# %, '#8)7#8 &* &"*,# &"(& 2#.& 1)<$%7 <#+*'# BCCD J&* %.7$)8# !'-, 2%&"
1#'+*'-(.7# &"'## /#(', (+&#' &"# 345K9 !"# '#,)$&, ($,* %.8%7(&# &"(& "%;" ).>
8#'1'%7%.; !'-, "(A# "%;"#' ;'*2&" *11*'&).%&%#,: (, -#(,)'#8 </ ,%;.%!7(.&$/
;'#(&#' !'- (.8 %.8),&'/ -('6#&>&*><**6 (.8 $*.;>&#'- #('.%.;, ;'*2&" #01#7>
&(&%*.,: "%;"#' 7(1%&($ ,1#.8%.;: (.8 $*2#' !0#8 (,,#& '(&%*,9 J588$/: MnT %,
,%;.%!7(.&$/ $*2#' +*' !'-, 2%&" "%;" ).8#'1'%7%.;9K Q*' &"# ,-($$#' ,(-1$# *+
345, +*' 2"%7" 2# ($,* "(A# (;# 8(&(: 7*#+!7%#.& #,&%-(&#, %.8%7(&# &"(& 345,
2%&" "%;" ).8#'1'%7%.; ('# /*).;#'9
TABLE 6
Probability of Hot Market IPO Defined by Underpricing
IPO amount 0.13* 0.16* 0.32** 0.43** 0.55** 0.01

SIC cluster 0.61** 0.61** 1.16** 1.44** 0.93** 0.26
Firm market-to-book 0.35** 0.36** 0..35** 0.33** 0.50**
Industry market-to-book 0.41** 0.46** 0.31 0.27 0.76**
Firm long-term expected earnings growth 0.04**
Industry long-term expected earnings growth 0.07**
Industry-adjusted
Assets 0.00 0.00 0.00 0.00 0.00
Operating income-to-assets 0.16 0.05 0.43 0.41 0.01
Capital expenditures-to-assets 2.47** 2.06* 2.25* 2.47** 2.42*
R&D-to-assets 2.69** 2.12** 3.69** 0.85* 3.62**
Fixed assets-to-assets 2.30** 2.01** 2.12** 3.24** 2.08**
Negative earnings 0.08 0.12 0.03 0.51* 0.08
Discretionary accruals 0.02 0.02
Firm age 0.02** 0.02**
Institutional ownership 0.51
Venture capital 0.11
Industry-adjusted
Operating income-to-assets, year 3 0.44
Capital expenditures-to-assets, year 3 0.20
No. of observations 1,898 1,793 993 857 1,120 933
Values are coefficients from a logit estimation of a hot or cold market IPO defined by IPO underpricing. The sample
consists of all nonfinancial firm IPOs in the SDC database from 1975–2000, except reverse LBOs, unit offerings, spinoffs,
IPOs offered at less than $1 a share, IPO firms that were not listed on Compustat or CRSP, and IPO firms that did not
have complete trading data on CRSP at the time of the IPO. Hot IPOs include 986 firms with underpricing in the top
quartile (greater than 25%) and cold IPOs include 912 firms with underpricing in the bottom quartile (less than 0.8%).
Firm financial characteristics are from Compustat and are year-end data for the IPO year (see text for details). Adjusted
firm characteristics are the median of values for the IPO less the median for the industry, defined by the same 2-digit SIC
category, excluding other IPOs in the same year and the previous five years. ** and * represent coefficients are significant
at 99% and 95%, respectively.
P*2#A#': 2"%$# "%;" ).8#'1'%7%.; !'-, (11#(' &* "(A# "%;"#' ;'*2&" *1>
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APPENDIX TABLE
IPO and Firm Characteristics at time of IPO for Hot, Cold, and Neutral Market IPOs from
1975–2000
Adjusted Firm
Characteristics
Markets by No. Markets by No.
Hot Cold Neutral Hot Cold Neutral
IPO Characteristics
SIC cluster 0.92** 1.07 0.94
Mean first-day return 21.9 21.1 25.9
IPO amount ($million, year 2000) 49.7* 42.1 50.0
IPO amount-to-capital expenditures 8.9** 3.5 8.0
Industry market-to-book 1.6** 1.3 1.5
Industry long-term expected earnings growth rate 20.0** 15.0 20.0
Firm Financial Characteristics
Market-to-book 2.5* 2.3 2.4 0.91 0.93 0.78
Long-term expected earnings growtha 30.0 28.0 30.0 8.0** 14.3 10.0
Operating income-to-assets 9.9** 14.8 10.0 0.1 2.8 1.3
Capital expenditures-to-assets 5.1** 8.7 5.4 0.9** 3.6 1.1
Debt-to-assets 4.8 7.7 5.3 9.3** 13.4 9.2
R&D-to-assets 0.4** 3.2 1.3 0.0** 1.4 0.0
Fixed assets-to-assets 12.1** 17.1 11.6 5.7 5.1 5.8
Assets ($million, year 2000) 108.0** 169.5 127.3 5.4 4.9 25.4
Sales ($million, year 2000) 79.9** 154.1 93.3 24.8 37.7 12.4
Other Firm Characteristics
Percent with negative earnings (mean) 40.1 35.2 42.7
Discretionary accruals-to-assets 5.3 4.2 6.4
Firm age (years) 7 7 n.a.
Institutional ownership 15.0** 11.5 15.8
Percent with venture capital (mean) 43.9 46.0 47.4
that did not have complete trading data on CRSP at the time of the IPO. Hot IPOs defined by number include 1,878 firms
that completed IPOs in periods of high issuance volume (defined by three-month moving averages of monthly counts of
IPOs scaled by new business formations); neutral period IPOs total 1,644 in the sample; the remaining 176 cold IPOs were
completed in the months that constituted the bottom third in the moving average counts. Firm financial characteristics are
from Compustat and are year-end data for the IPO year (see text for details). Adjusted firm characteristics are the median
of values for the IPO less the median for the industry, defined by the same 2-digit SIC category, excluding other IPOs in
the same year and the previous five years. ** and * represent that hot market characteristics are significantly different from
cold market characteristics at 99% and 95%, respectively, where hot market by number is compared to cold market by
number. All variables are median values except as denoted.
a
Data available for only 1,166 hot market, 63 cold market, and 995 neutral market IPOs by number.
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Helwege and Liang 2004

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JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS VOL. 39, NO.

Initial Public Offerings in Hot and Cold Markets

II. IPO Cycles: Theory and Evidence

A. Signaling Models and Other Asymmetric Information Models

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B. Models of the Decision to Do an Initial Public Offering

4(,&*' (.8 d#'*.#,% J+*'&"7*-%.;K (.($/W# *1&%-($ 345 &%-%.; %. ( -*8#$

C. Irrationality and Long-Term Underperformance of Hot Market Firms

A. Defining Hot and Cold IPO Markets

B. Benchmarking Stock Return Performance

IV. Empirical Tests of Differences between Hot and Cold

A. Stock Price Performance of Hot and Cold IPOs

Year All Hot Cold Neutral Hot Cold Neutral

Panel A. Calendar Year Returns

C. Firm Characteristics in the Year of the IPO

Hot and Cold

Adjusted Firm Characteristics

Markets by No. Markets by SIC Markets by No. Markets by SIC

Hot Cold Hot Cold Hot Cold Hot Cold

D. Characteristics of IPO Firms in Years Subsequent to the IPO

Year After IPO

Year 1 Year 3 Year 5

Industry-Adjusted Medians (%)

E. Multivariate Logit of the Decision to Issue in a Hot or Cold Market

[* +(' 2# "(A# 7*.,%8#'#8 #(7" *+ &"# A('%*), +(7&*', %. %,*$(&%*.9 ^#0&: 2#

IPO amount 0.03 0.04 0.01 0.00 0.16 0.07

!.8%.;: (, &"# 7*#+!7%#.& *. %.8),&'/ $*.;>&#'- #('.%.;, ;'*2&" %, 1*,%&%A# (.8

F. Multivariate Analysis of Whether the IPO Will Experience High or Low

IPO amount 0.13* 0.16* 0.32** 0.43** 0.55** 0.01

Markets by No. Markets by No.

Hot Cold Neutral Hot Cold Neutral

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IPO amount 0.13* 0.16* 0.32 0.43 0.55** 0.01