UNDERPRICING IN COLD AND HOT ISSUE MARKETS: Testing the Changing Risk Composition Hypothesis on the Swedish IPO Market.

Abstract

This paper aims to investigate the difference in average first-day return on initial public offerings (IPOs) between the “cold issue” market of 2010-2013 and the “hot issue” market of 2014-2016 on the Swedish IPO market. IPOs during the hot issue market were subject to an average first-day return of 16.57 % compared to 6.02 % during the cold issue market. Among other theories and hypotheses trying to explain such swings in first-day returns over time, the changing risk composition hypothesis has been tested for in this thesis. Our results do not provide evidence that a larger fraction of riskier IPOs can serve as an explanation to the higher average first-day return in the hot issue market. However, looking into alternative potential explanations, we found that IPOs related to the information-technology industry could be central to the difference in average first-day returns.