Adverse Selection Costs, Sequential Learning, and the Within-Wave Timing of Initial Public Offerings - Evidence from Germany

Abstract

This paper investigates whether IPO firms' characteristics associated with adverse selection costs, which are in particular proxies for asymmetric information and signaling, differ across the recent German IPO wave from 1996 to 2002. Theoretical research on sequential learning within an IPO wave suggests that issues undertaken late in a wave exhibit larger proxies for information asymmetries and apply less signaling (learning hypothesis). This issue is interesting since previous empirical research focused on explanations of whole IPO waves and "hot issue" markets, while dynamics within waves were neglected. In a logistic regression with early and late wave IPOs (within-wave timing) as the dependent variable, the hypothesis is clearly confirmed for asymmetric information and weakly confirmed for signaling mechanisms. The findings in the sample of 315 IPOs are not driven by the occurrence of "hot issue" markets, and are robust to a special consideration of industry waves and several versions of the timing variable. Although these results imply a learning process, more research is needed to generalize the findings for more IPO waves and countries.