Essays on initial public offerings of stock

Initial public offerings of stock (IPOs) are examined in three essays. The first chapter examines the performance of reverse LBOs before and after their IPO. The return to public ownership of reverse LBOs is found to coincide with a peak in their operating performance. The market seems to anticipate this pattern. Several possible explanations are discussed. Hidden action and hidden information phenomena are likely to be at work. Also, non-informational effects potentially prevent poorly performing LBOs from going public.; The second chapter looks for evidence of fad behavior in the IPO market. IPOs issued immediately before the stock market crash of October 1987 are compared with IPOs issued immediately afterwards. Pre-crash IPOs are found to perform poorly over their first 24 months of trading, excluding the crash period. Post-crash IPOs perform normally over the same horizon. Over the 18 months following the crash, pre-crash IPOs underperform post-crash IPOs. The results are consistent with the presence of an optimistic fad before the crash. Earnings news were not a primary factor in adjusting investors' expectations.; High first-day IPO average returns have been extensively documented. The third chapter examines whether price support by underwriters can explain them. Price support may affect first-day IPO returns in two ways. Returns may be high on average because the left tail of the distribution is censored (censorship effect). They may also be boosted by the expectation that the underwriter will support the price--even if no price-supporting trades actually take place (guarantee effect). The evidence provides little support for the presence of either a censorship or a guarantee effect. The IPO literature's interpretation of high initial returns as evidence of underpricing by the underwriter appears justified.