Journal of Corporate Finance 15 (2009) 316–330

Contents lists available at ScienceDirect

Journal of Corporate Finance

j o u r n a l h o m e p a g e : w w w. e l s e v i e r. c o m / l o c a t e / j c o r p f i n

An examination of IPO secondary market returns☆

Daniel J. Bradley a,⁎, John S. Gonas b, Michael J. Highfield c, Kenneth D. Roskelley c
a
University of South Florida, United States
b
Belmont University, United States
c
Mississippi State University, United States

a r t i c l e i n f o a b s t r a c t

Article history: IPO stock prices increased approximately 2.3% on the first day of secondary market trading over
Received 25 July 2008 the period 1993 through 2003. While these aftermarket returns are accentuated during 1999
Received in revised form 7 January 2009 and 2000, they persist after the bubble burst and even increase as a percentage of total
Accepted 13 January 2009
underpricing. We explore several non-mutually exclusive hypotheses to explain our findings
Available online 23 January 2009
including price support, laddering, retail sentiment, and information asymmetry. Our results
are most consistent with the view that higher secondary market returns accrue to IPOs with
JEL classification:
more information asymmetries possibly due to price and aggregate demand uncertainty.
G12
© 2009 Elsevier B.V. All rights reserved.
G14
G24

Keywords:
IPO secondary returns
Underpricing
Partial adjustment
Sentiment investors
Aggregate demand uncertainty

1. Introduction

Documentation of the large initial returns accruing to those receiving IPO allocations at the offer price is ubiquitous in the
finance literature. For example, Loughran and Ritter (2004) examine 6391 IPOs issued during the period 1980–2003 and find that
the mean first-day return is 18.7%, but averaged 65.0% during the bubble period of 1999–2000. In their study, like almost all others,
underpricing is defined as the percentage difference between the offer price and closing price on the first day of trading.1
Who profits from these extraordinary returns? Despite the voluminous offer-to-close underpricing literature, there is little
research focusing on first-day open-to-close returns for IPOs. In one of the few papers on the subject, Barry and Jennings (1993)
investigate a small sample of IPOs from 1988 to 1990 and find that first-day open-to-close secondary market returns for IPOs are
only 60 basis points; thus, investors fortunate enough to be allocated shares at the offer price garnish virtually all of the initial return.
We examine secondary market trading for a sample of 2531 IPOs placed in U.S. markets from January 1, 1993 to December 31,
2003. Using transaction data, our results show that the average IPO gained an economic and statistically significant 2.3% from
open-to-close on the first day of trading, almost four times more than that reported by Barry and Jennings (1993). Further, we find

☆ The authors are grateful for helpful comments from Nancy Anderson, Randy Campbell, Kenneth Carow, Jack Cooney, Ken Cyree, Jacqueline Garner, Brad Jordan,
Sangkyoo Kang, Patrick Lach, Chris Lamoreaux, Jay Ritter, Robert Van Ness, Jeffry Netter (The Editor), an anonymous referee, and seminar participants at the CFA
Society of Mississippi, Belmont University, Louisiana Tech University, Mississippi State University, the University of Kentucky, the University of Mississippi, the 2005
Financial Management Association Annual Meeting, the 2007 Midwest Finance Association Annual Meeting, and the 2007 Eastern Finance Association Annual
Meeting. Research support was provided by the College of Business at Mississippi State University and the Eller College of Management at the University of Arizona.
A previous version of this paper was presented under the following title: “Do Investors Leave Money on the Table? IPO Secondary Market Returns and Volatility.”
All errors remain the sole property of the authors.
⁎ Corresponding author. University of South Florida, 4202 E. Fowler Ave., BSN 3122, Tampa, FL 33620, United States. Tel.: +1 813 974 6326 (Office).
E-mail address: dbradley@coba.usf.edu (D.J. Bradley).
1
See also Logue (1973), Ibbotson (1975), Ibbotson and Jaffe (1975), Ritter (1984), Miller and Reilly (1987), Ibbotson et al. (1988) and Loughran and Ritter (2002).

0929-1199/$ – see front matter © 2009 Elsevier B.V. All rights reserved.
doi:10.1016/j.jcorpfin.2009.01.003
 D.J. Bradley et al. / Journal of Corporate Finance 15 (2009) 316–330 317

that the average IPO does not reach an equilibrium price point until approximately 2 h into trading. Although this average is driven
upwards by IPOs that went public during the bubble period, we find first-day aftermarket returns from 2001–2003 remained
statistically and economically large at 2.2%. In fact, the open-to-close return during the post-bubble period represents
approximately one-fifth of total underpricing, which is more than double the proportion observed during the bubble period. We
explore four possible non-mutually exclusive hypotheses to help explain our findings: price support, laddering, information
asymmetry, and retail sentiment.
In a sample of “hot” IPOs where price support is unlikely to be present, we find our results persist and therefore argue that price
support is an unlikely explanation. For instance, we find intraday IPO returns are strongly related to adjustments in the offer price
relative to the indicative file range. To our knowledge, there is no theoretical explanation for this finding. The Benveniste and
Spindt (1989) information acquisition (partial adjustment) model does not predict this relation since it relies explicitly on private
information gained during the institutional book-building period and should be incorporated at the first trade. Nevertheless, a
simple strategy of buying an IPO priced above the file range at the open and selling the shares by the end of the first day of trading
would yield a 4.5% one-day raw return during our sample period.
Laddering is a quid quo pro arrangement between the underwriter and investor whereby the underwriter allocates IPO shares
to an investor, and in return for the allocation, the investor agrees to buy more shares in the aftermarket. We cannot directly test
the laddering hypothesis because allocation and commission data are not publicly available. However, our results are robust post-
bubble when the incentive to ladder was weak due to increasing scrutiny and litigation of this practice. Thus, laddering may have
contributed to higher open-to-close returns, but is unlikely a complete explanation for our results.
We find that secondary market returns are positively related to the contemporaneous proportion of buy-side and small trades.
This is consistent with the literature suggesting that retail sentiment can influence post-IPO prices, assuming small trades is a
proxy for retail participation. However, retail sentiment relies on overoptimistic investors pushing returns higher, and a reversal
should be observed in post-IPO returns. We examine long-run post-IPO excess returns over various intervals and, consistent with
the literature, find a negative relation between long-run returns and offer-to-open returns, but not open-to-close returns. While
we find a robust relation between the proportion of small trades and IPO open-to-close returns, we caution the reader from
interpreting this as evidence strictly consistent with retail sentiment.
Finally, we consider information asymmetry as an explanation for our findings. All else equal, larger and older firms are subject
to fewer information asymmetry problems. Information asymmetry may be partly in the form of aggregate demand uncertainty
which is not resolved until the issue opens for secondary market trading. Aggregate demand uncertainty is more prevalent across
firms during more volatile time periods and within firms that pose more information asymmetry risks, such as smaller and high
Beta (β) firms. We indeed find that open-to-close returns are negatively related to firm size and positively related to market
volatility and Beta. While we argue Beta at least partially measures the degree of asymmetric information in the IPO, it is possible
that it also proxies for unobservable, firm-specific characteristics.
The remainder of the paper is as follows: Section 2 presents the previous literature, Section 3 describes the data and descriptive
statistics, Section 4 provides empirical results, and Section 5 concludes.

2. Related literature

The existing IPO literature almost exclusively defines underpricing as the percentage difference between the offer price and first-
day closing price. There are a few exceptions. Barry and Jennings (1993) investigate open-to-close returns for 229 IPOs between
December 1988 and December 1990. They find that almost all of the first-day's return is reflected in the opening transaction,
suggesting that IPO subscribers who are allocated shares at the offer price are the sole beneficiaries of underpricing. This result is fully
consistent with the Benveniste and Spindt (1989) model where the suppliers of information accrue all benefits of underpricing.
While Barry and Jennings (1993) focus on the open-to-close return, Aggrawal and Conroy (2000) investigate the offer-to-open
return by focusing on the price discovery process of IPOs during the pre-opening window.2 Using propriety data, they also find that the
first quote entered by the lead underwriter in the pre-opening period explains a large percentage of the initial return. Unlike Barry and
Jennings, however, the mean open-to-close return in their sample is roughly 1.54%.3 Similarly, Schultz and Zaman (1994) find a positive
3% open-to-close return in their sample of 72 IPOs from 1992, with almost all of this occurring in the first 10 min of aftermarket trading.

2.1. Price support

One possible reason that both Schultz and Zaman (1994) and Aggrawal and Conroy (2000) find a positive open-to-close return
is the existence of price support in both samples. As Rudd (1993) and Hanley et al. (1993) point out, price support in the secondary

2
There is a pre-opening window just before trading begins in an IPO. In Aggrawal and Conroy's (2000) study, this period can be a maximum of 5 min and a
minimum of 0 s. The lead underwriter informs Nasdaq when it wants to begin trading the IPO. During this period, the lead underwriter enters the first quote and
other market makers typically follow suit. These quotes are not binding as market makers can add, cancel, or revise their quotes before trading actually begins. On
January 26, 1999, Nasdaq implemented SR-NASD-98-98 as a means to reduce volatility on the first day of trading. The regulation extended the pre-opening
window from a five-minute maximum to a mandatory 15 min. If the bid and ask quotes were locked or crossed at the end of this 15 min, the regulation allowed
for an additional 15-minute window. See Securities Exchange Act Release No. 34-40968 (January 22, 1999), 64 FR 4729 (January 29, 1999).
3
Aggrawal and Conroy (2000) report that the mean offer-to-close return is 19.47% and the mean offer-to-open return is 17.66%. Hence, the implied mean open-
to-close return is roughly 154 basis points when calculated using the following formula: (1 + Total Underpricing) = (1 + Offer-to-Open) × (1 + Open-to-Close). It
should be noted that this 1.54% mean open-to-close return is simply an estimate due to the calculation of a geometric return on arithmetic averages.
318 D.J. Bradley et al. / Journal of Corporate Finance 15 (2009) 316–330

market censors the left tail of the return distribution. This censoring will generate a positive mean return as long as the
underwriter chooses to support the IPO's price. Benveniste et al. (1996) argue that price support bonds uninformed investors to
underwriters, and subsequent studies have found overwhelming evidence that price support is a widespread practice.4

2.2. Laddering

Laddering is the preferential allocation of IPOs to clients who commit to buy additional shares of the offering company's stock in
secondary market trading in return for “hot” IPO allocations.5 Hao (2007) models the potential effect these “tie-in” agreements
could have on first-day trading behavior. She suggests that this artificial buying behavior could help the underwriter provide price
support to “cold” IPOs and might generate price increases for “hot” IPOs. However, this price support is temporary, resulting in a
negative correlation between long- and short-run returns, an implication consistent with Ritter (1991). In addition, her model
suggests that the price effects caused by laddering will be larger when information momentum is present; thus, the price effects
will persist for “hot” IPOs even after the laddering trades cease. While the collective evidence in Griffin et al. (2007) is consistent
with laddering, a direct test would require the matching of allocation and commission data, which are not available.

2.3. Information asymmetry and aggregate demand uncertainty

Rock (1986) argues that the IPO process will be influenced by the information asymmetry between underwriters, the firm, and
investors. This information asymmetry creates a winner's curse that discourages uninformed investors from participating in the
IPO. Beatty and Ritter (1986) predict that the greater the asymmetry is, the larger the underpricing will be in the IPO. Consistent
with these models, Michaely and Shaw (1994) find that IPOs tend to be more underpriced when more informed investors
participate in the IPO. Leite (2007) extends the model to show that underpricing may exist even though all investors are informed,
and even when the marginal investor is better informed than the underwriter.
Lowry et al. (2008) note that the information asymmetry may be in the form of the aggregate demand for the IPO. Because an
IPO is a common-value auction, they posit that this aggregate demand uncertainty will have similar effects and should be positively
related to the level of underpricing. Consistent with this form of the information asymmetry hypothesis, they find that IPO returns
are more volatile when more difficult to value firms (e.g., young, small, tech companies) go public. In addition, this volatility in IPO
returns is positively related to average underpricing. Because this uncertainty about demand is not resolved until after trading
commences, it could play a role in explaining open-to-close returns.6
In a similar vein, Hanley and Hoberg (2008) look at IPO underpricing and disclosure by management in the prospectus. While
they find that more disclosure results in less underpricing, they also report that the number of risk-factors disclosed in the
prospectus is related to price uncertainty.7 They argue that higher-risk firms are subject to more divergence of investor opinion,
and hence are more difficult for the underwriter to price. This uncertainty in aggregate demand results in more underpricing
despite the additional disclosure in the prospectus, consistent with the findings in Arnold et al. (2007).

2.4. Retail sentiment

In order to stimulate demand for an IPO, Cook et al. (2006) argue that a marketing campaign by investment banks aimed at
bringing sentiment investors into the IPO market provides substantial benefits to the issuing firm and the banker's institutional
clients. They find that such promotional effort leads to a higher valuation and initial returns. Alternatively, Aggarwal et al. (2002)
suggest that managers strategically underprice their IPOs, thereby creating information momentum. That is, “hot” IPOs that are
underpriced will generate “buzz” from the media and among investors, and this information momentum shifts the demand curve
for IPOs outward. Managers seek to create information momentum so that their personal wealth is maximized through the
expiration of the lockup period.8 This is similar to the Cao and Shi (2006) signaling model where high quality firms underprice
their IPO and generate publicity, reducing the uncertainty about the industry's product demand.
Ljungqvist et al. (2006) model the process in which institutional investors slowly sell their allocations to sentiment investors at
prices exceeding fundamental value. In Cornelli et al. (2006) model, institutional investors are able to observe the sentiment
investor's demand via the when-issued IPO market which is active through much of Europe.9 They find evidence that initial
aftermarket returns for IPOs are related to retail demand as measured by IPO prices in this when-issued market. Similarly, Dorn

4
See Lewellen (2006), Ellis et al. (2000), Benveniste et al. (1998), Aggarwal (2000) and Chowdry and Nanda (1996).
5
The Securities and Exchange Commission (SEC) reiterated the illegal nature of “tie-in” agreements in a Staff Legal Bulletin dated August 25, 2000 (http://
www.sec.gov/interps/legal/slbmr10.htm). Furthermore, the practice of laddering was highlighted in a front-page Wall Street Journal article on December 6, 2000
(Pulliam and Smith, 2000)”.
6
This uncertainty is unlikely to be fully resolved at the open of the secondary market since it may take several days until the actual number of shares outstanding is
known due to the overallotment option. In addition, Boehmer and Fishe (2004) present evidence that short-covering trades over the first two trading days are closely
related to price support, further obscuring the aggregate demand for the issue. Similarly, Chen and Wilhelm (2008) model how other complications, such as laddering
and penalty bids, impact secondary market prices and demand when large information flows are anticipated soon after the IPO date.
7
Beatty and Welch (1996) investigate the impact and legal implications of inclusion and omission of firm-specific risk factors in a firm's prospectus.
8
Field and Lowry (forthcoming), Boehmer et al. (2006) and Chemmanur and Hu (2007) present evidence that institutions are capable of picking winners in
IPOs. In addition, institutional flips and volume appear to predict future returns.
9
When-issued markets allow small, retail investors to trade IPOs before secondary market trading begins.
 D.J. Bradley et al. / Journal of Corporate Finance 15 (2009) 316–330 319

(forthcoming) examines trading of IPOs in the German when-issued market and finds that small investor sentiment drives post-
IPO prices due to investor overoptimism.
Unlike price support and laddering, the existence of sentiment investors does not itself imply that there should, on average, be an
abnormal open-to-close return on the first day in the secondary market.10 For instance, if institutional investors know retail demand,
then, on average, opening prices should reflect that demand and open-to-close returns should be close to zero on the first day of
trading. However, given that the U.S. has no when-issued market, retail demand is not observed until after an issue starts trading.

3. Data and descriptive statistics

We collect a sample of IPOs using the Thomson Financial Securities Data Company U.S. New Issues Database (SDC) for the period
January 1, 1993 through December 31, 2003. Consistent with previous research, we eliminate depository shares, spin-offs, real estate
investment trusts (REITs), reverse leveraged buyouts, unit offers, banks, savings and loans, closed-end funds, IPOs with offer prices less
than five dollars, and firms not covered in the Trade and Quote (TAQ) database.11 In addition to issuer and issue characteristics obtained
from the SDC database, we obtain Carter and Manaster (1990) underwriter reputation ratings from Loughran and Ritter (2004).12
Opening transaction prices, closing transaction prices, bid-ask spreads, and other intraday trade information is collected from TAQ. Daily
returns on the Nasdaq market index are collected from CRSP. Our sample consists of 2531 observations for which we have full
information meeting the criteria described above.
Table 1 gives the descriptive statistics of our sample. As shown in Panel A, the average offer size (Offer Size) is approximately
$76.7 million and the mean offer price (Offer Price) is $13.37. Roughly half receive venture capital financing (Venture Capital), and
since approximately 85% of our IPOs are Nasdaq-listed (Nasdaq), it is not surprising that a significant portion of the sample (43%) is
classified as high-tech (Tech). These averages are consistent with other IPO studies with overlapping sample periods.
Descriptive statistics for other conditioning variables previously shown to influence underpricing are also presented in Table 1.
Bradley and Jordan (2002) show that Overhang, shares retained by insiders scaled by the number of shares offered, is positively related
to underpricing. Our average of approximately 3.6% is consistent with their study. The average IPO during our sample period has an offer
price 4.7% greater than the midpoint of the original file range (Partial). We find that the average Carter and Manaster (Reputation)
ranking, a relative measure of an investment bank's reputation, is 7.7 on a 9-point scale, the average firm is about 12 years old (Age), and
85% of firms are initially listed on Nasdaq. Next, Nasdaq Lag shows that the average cumulative return of the Nasdaq composite for the
fifteen days prior to the IPO date is eight basis points.
Average underpricing is about 30.8%, with most of this return accruing at the first trade as demonstrated by the offer-to-open
return of 27.5%. In fact, this primary market return represents close to 90% of underpricing. While Barry and Jennings (1993) report
an average 60 basis point return between the opening trade price and the closing price on the first day of secondary market trading
and argue that such a return would not overcome transaction costs, we document a much larger and potentially exploitable
average secondary market return (Open-to-Close) of 2.3%.
The mean coefficient of the daily market risk premium as estimated on the daily excess return for the first six months of trading is
1.15 (Beta). It is estimated using the CRSP value-weighted index and the six month (26 Week) T-Bill rate. The daily standard deviation of
the CRSP value-weighted index (Index Std. Dev.) is 0.93% for six months following the IPO. An ex-post beta coefficient serves as a proxy
for the price uncertainty of the IPO, while the standard deviation of the market index provides a measure of the expected level of
uncertainty in the market.
The average bid-ask spread as a percentage of the midpoint of the bid-ask spread at the open (Open Spread) is 1.9%. Higher bid-
ask spreads at the opening of secondary market trading should indicate lower liquidity. Based on the findings of Aggrawal and
Conroy (2000), we also consider the time of day when trading starts and find that about 81% of IPOs begin trading before noon.
In Panel B, we present intraday microstructure-related variables. The average return over a 5-minute interval once IPO trading begins
(Interval Return) is about 4 basis points. The average bid-ask spread at the beginning of each of these 5-minute intervals (Purchase Spread)
averages 1.9%. Finally, we classify trades as retail or institutional sales based on the algorithm in Lee and Radhakrishna (2000). Following
Malmendier and Shanthikumar (2007), trade sizes less than $20,000 are classified as retail trades (Retail), and those above $50,000 are
classified as institutional trades. Further, we classify those trades that are buy-side (Buys) and sell-side initiated based on the algorithm in
Lee and Ready (1991). In our sample, 36% of trades in the first day are retail investor transactions, and 40% of trades are buy-side initiated.
To examine the intraday patterns of IPOs on the first day of trading, we plot average trade-to-close returns by 5-minute
intervals in Fig. 1. We provide these returns over three periods: 1993–1998, 1999–2000 and 2001–2003. As shown, returns start off
high, but decrease at a decreasing rate and appear to reach an equilibrium price level approximately 2 h into trading. Though the
pattern is most visible during 1999–2000, it is present in the other two periods as well.

4. Empirical results for IPO returns

Our descriptive statistics in Table 1 are consistent with previous studies documenting that the majority of underpricing is
impounded in the first trade; however, unlike the 1988–1990 period studied by Barry and Jennings (1993), Table 1 and Fig. 1

10
For additional discussion of the impact of retail investors on market prices, see Barber et al. (2009).
11
We also require that firms are listed in the Center for Research in Security Prices (CRSP) database, but all firms listed in the TAQ database meet this less
stringent requirement.
12
This information is available at Jay Ritter's website (bear.cba.ufl.edu/ritter). We also correct our sample using the information on Ritter's website about
known errors in the Thomson Financial SDC New Issues database.
320 D.J. Bradley et al. / Journal of Corporate Finance 15 (2009) 316–330

Table 1
Descriptive statistics.

N Mean Median Std. Dev. Minimum Maximum

Panel A: cross-sectional variables
Offer Size ($M) 2531 76.73 42.50 190.57 4.70 5470.00
Offer Price ($) 2531 13.36 13.00 4.66 5.00 53.00
Venture Capital (Binary) 2531 0.52 1.00 – 0.00 1.00
Tech (Binary) 2531 0.43 0.00 – 0.00 1.00
Overhang (%) 2531 3.58 3.05 3.91 0.00 92.48
Partial (%) 2531 4.72 0.00 26.10 − 58.33 220.00
Reputation (Ranking) 2531 7.72 8.00 1.70 1.00 9.00
Nasdaq (Binary) 2531 0.85 1.00 – 0.00 1.00
Age (Years) 2531 11.88 7.00 16.68 0.17 152.00
Nasdaq Lag (%) 2531 0.08 0.11 0.37 − 1.51 1.59
Total Underpricing (%) 2531 30.78 12.50 57.50 − 43.27 706.25
Offer-to-Open (%) 2531 27.50 11.18 53.72 − 38.46 900.00
Open-to-Close (%) 2531 2.35 0.00 13.59 − 40.82 128.66
Beta (β) 2531 1.15 1.01 0.93 − 1.68 5.07
Index Std. Dev. (%) 2531 0.93 0.76 0.40 0.40 1.91
Open Spread (%) 2531 1.90 1.48 2.92 0.00 23.53
Morning (Binary) 2531 0.81 1.00 – 0.00 1.00

Panel B: microstructure variables

Interval Return (%) 152,938 0.04 0.00 1.79 − 28.71 47.82
Purchase Spread (%) 152,938 1.91 1.38 1.72 0.00 24.18
Retail (%) 152,938 36.34 23.08 35.03 0.00 100.00
Buys (%) 152,938 40.23 42.41 13.94 0.00 100.00

The sample contains 2531 IPOs issued between January 1, 1993 and December 31, 2003. The sample is restricted to IPOs recorded in Thomson Financial's New Issues
Database (SDC) with an offer price of at least five dollars. We exclude spinoffs, Real Estate Investment Trusts (REITs), unit offers, Savings and Loans, American
Depository Receipts (ADRs), closed end investment funds, and firms not listed in the Trade and Quote (TAQ) database. Panel A provides descriptive statistics for
cross-sectional variables. Panel B provides descriptive statistics for microstructure variables. The cross-sectional variables of interest shown in Panel A are as
follows: Offer Size is calculated as total shares sold times the offer price, presented in millions of dollars. Offer Price is the price per share offered to primary market
investors. Venture Capital is a binary variable equal to one if the issuing firm is venture-capital backed, zero otherwise. Nasdaq is a binary variable equal to one if
the IPO is traded on the Nasdaq, zero otherwise. Tech is a binary variable equal to one if the issuing firm's business is in a high-tech industry, zero otherwise.
Overhang is the number of shares retained by insiders divided by the number of shares offered in the IPO. Partial is the percentage change from the middle of the
original file range to the offer price. Reputation is the Carter-Manaster reputation ranking of the lead underwriter of the IPO for the year of the IPO. Age is the age of
the issuing company in years from its date of incorporation to the date of issue. Nasdaq Lag is the cumulative return of the Nasdaq composite for the fifteen days
prior to the IPO date. Total Underpricing is the percentage change from the offer price to the last trade/closing price on the first day of trading. Offer-to-Open is the
percentage change from the IPO offer price to the first trade/open price on the first day of trading. Open-to-Close is the percentage change from the first trade/
open price on the first day of trading to the last trade/closing price on the first day of trading. Beta is the mean coefficient of the daily market risk premium as
estimated on the daily excess return for the first six months of trading, where the market rate of return is proxied by the CRSP value-weighted index and the risk-
free return is proxied by the six month (26 Week) T-Bill rate. Index Std. Dev. is the daily standard deviation of the CRSP value-weighted index for the six months
following the date of issue. Open Spread is the bid-ask spread as a percentage of the midpoint of the bid-ask spread posted at the time of the first aftermarket trade.
Morning is a binary variable equal to one if the issue opens prior to noon, zero otherwise. The microstructure variables of interest shown in Panel B are as follows:
Interval Return is the raw percentage return over a 5-minute interval (i.e., 0-to-5 or 5-to-10) of aftermarket trading. Purchase Spread is the bid-ask spread as a
percentage of the midpoint of the bid-ask spread posted at beginning of each 5-minute interval. Retail is the percentage dollar volume over a 5-minute interval
classified as retail trades based on the Lee and Radhakrishna (2000) algorithm. Buys is the percentage dollar volume over a 5-minute interval classified as a by
trade based on the Lee and Ready (1991) algorithm. Offer prices are obtained from SDC. Transaction data, opening prices, closing prices, and other intraday trade
information is collected from TAQ. Daily returns and volatility measures on the Nasdaq market index and the CRSP value-weighted index are collected from the
Center for Research in Securities Prices (CRSP) file. T-Bill returns are obtained from the Federal Reserve Bank of St. Louis FRED® database. Carter-Manaster
Underwriter Reputation Rankings are collected from Jay Ritter's IPO website.

indicate that secondary aftermarket rewards not only exist, but they exist for a substantial period of time after secondary market
trading begins. That is, it does not appear that one has to buy immediately at the opening transaction to experience a positive
return by the close of the first trading day. We begin with univariate sorts of the data to further examine and attempt to explain
these results.

4.1. Univariate sorts

4.1.1. Transaction-based returns

Building on the general underpricing literature and Hanley's (1993) finding that upward adjustments in the offer price are
positively associated with greater underpricing, Panel A of Table 2 provides sorts based on where an issue is offered relative to the
original file range. The Benveniste and Spindt (1989) partial adjustment model does not predict a pattern between aftermarket
returns and offer prices relative to the file range, but as shown, one clearly exists. For the full sample of issues over the 1993–2003
period, deals priced above the indicative file range have an open-to-close return of 4.45%, whereas deals priced within and below
have corresponding secondary market returns of 1.84% and 0.37%, respectively. This same pattern is evident during each period,
and is exacerbated during the “bubble” period of 1999–2000 during which IPOs priced above the file range exceeded 8% open-to-
close returns.
 D.J. Bradley et al. / Journal of Corporate Finance 15 (2009) 316–330 321

Fig. 1. Aftermarket returns. The sample contains 2531 IPOs issued between January 1, 1993 and December 31, 2003. The sample is restricted to IPOs recorded in
Thomson Financial's New Issues Database (SDC) with an offer price of at least five dollars. We exclude spinoffs, Real Estate Investment Trusts (REITs), unit offers,
Savings and Loans, American Depository Receipts (ADRs), closed end investment funds, and firms not listed in the Trade and Quote (TAQ) database. This figure
provides a comparison of average opening trade-to-closing trade aftermarket returns across the 1993–1998, 1999–2000 and 2001–2003 time periods in five-
minute intervals from the time the issue opened for trading.

The open-to-close returns in Table 2 are much larger than previously reported and perhaps exploitable. However, do these returns
concentrate around the first trade or do they persist for some time? To investigate this question, Table 2 provides results across several
intervals throughout the first trading day. We report 5-, 15-, 30-, 60-, 120-, 180-, 240-, and 300-to-close return intervals. Deals priced
above the file range return about 1.5% on average even up to 30 min after the IPO opens for secondary market trading (30-to-Close).
Even for deals priced within the file range, trade-to-close returns 15 min after trading has begun exceed 1% (15-to-Close).
As noted earlier, one possible reason for large open-to-close returns may be price support by the lead underwriters. It is well
documented that underwriters support the price of cold IPOs, thus truncating the left-side of the return distribution. However, if
price support is the primary explanation we should not observe significant open-to-close returns in “hot” IPOs since they should
not receive price support.
In Panel B of Table 2, we provide results based on sorts of ex-post offer-to-open returns. We define hot IPOs as those in the top
quartile of offer-to-open returns. This equates to an offer-to-open return of 29.16% or greater. Likewise, “cold” IPOs are defined as
those in the bottom quarter of offer-to-open returns, a stipulation which requires an offer-to-open return of less than 2.67%. While
one would expect some form of price support for cold IPOs, it is very unlikely that hot IPOs, opening over 29% from the offer price,
need price support. However, as shown in Panel B of Table 2, hot IPOs experience higher secondary market returns than cold IPOs.
Thus, price support is an unlikely explanation for our results.
The results presented in Panels A and B of Table 2 cast doubt on the theory that price support is the source of the large
aftermarket returns, but, as noted previously, our results may be due to laddering. Hao (2007) argues that these quid-pro-quo
agreements possibly increase first-day returns for high-profile IPOs as investors buy additional shares of “hot” IPOs in the
aftermarket in exchange for receiving hot IPO allocations. Griffin et al. (2007) find evidence consistent with this notion, but both
studies are limited to theoretical models and indirect evidence because allocation data is not available.
With that said, the results in Panels A and B of Table 2 are only partially consistent with laddering. Turning our attention to the
bottom section of each panel, we find that significant aftermarket returns persist through 2001–2003, a time period when the
incentive to ladder was less pervasive due to increasing scrutiny of the practice by the SEC and laddering-based lawsuits filed in
2001. The fallout from a Wall Street Journal front-page article on December 6, 2000 (Pulliam and Smith, 2000) and subsequent
litigation likely deterred the practice even before the proposal of NASD Rule 2712 and NYSE Rule 470A in July 2002.13 Thus, while
laddering likely contributed to secondary price movements, particularly during the 1999–2000 period, it seems to fall short in
providing a full explanation for our results.
Information asymmetry may play a role in explaining aftermarket returns. Lowry et al. (2008) argue that aggregate demand
uncertainty is a form of information asymmetry which is quantified by price uncertainty, and they show that underpricing is larger
for firms that are more difficult to price. Hanley and Hoberg (2008) demonstrate that the number of risk factors listed in firm's

13
As noted by Hao (2007), more than 300 laddering-based lawsuits were filed in 2001. See the Pricewaterhouse-Coopers LLP 2001 Securities Litigation Study at
http://www.pwcglobal.com.
322 D.J. Bradley et al. / Journal of Corporate Finance 15 (2009) 316–330

Table 2
Univariate sorts: intraday transaction-to-transaction returns.

N⁎ 00-to-close 5-to-close 15-to-close 30-to-close 60-to-close 120-to-close 180-to-close 240-to-close 300-to-close

return (%) return (%) return (%) return (%) return (%) return (%) return (%) return (%) return (%)
Panel A: file range
All issues: 1993–2003 2531 2.35⁎⁎⁎ 1.79⁎⁎⁎ 1.40⁎⁎⁎ 1.01⁎⁎⁎ 0.58⁎⁎⁎ 0.26⁎⁎ 0.21⁎⁎ 0.18⁎⁎ 0.13⁎⁎
Above file range 795 4.45⁎⁎⁎ 2.39⁎⁎⁎ 1.95⁎⁎⁎ 1.54⁎⁎⁎ 0.97⁎⁎⁎ 0.61⁎⁎ 0.48⁎⁎ 0.35⁎⁎ 0.36⁎⁎
Within file range 1168 1.84⁎⁎⁎ 1.71⁎⁎⁎ 1.39⁎⁎⁎ 0.88⁎⁎⁎ 0.53⁎⁎ 0.21 0.19 0.25⁎ 0.09
Below file range 568 0.37 1.13⁎⁎⁎ 0.66⁎⁎ 0.54⁎⁎ 0.11 − 0.12 − 0.13 − 0.20 0.01
All issues: 1993–1998 1648 0.75⁎⁎⁎ 1.59⁎⁎⁎ 1.30⁎⁎⁎ 1.02⁎⁎⁎ 0.62⁎⁎⁎ 0.38⁎⁎⁎ 0.30⁎⁎⁎ 0.22⁎⁎⁎ 0.16⁎⁎⁎
Above file range 438 1.86⁎⁎⁎ 1.80⁎⁎⁎ 1.55⁎⁎⁎ 1.19⁎⁎⁎ 0.89⁎⁎⁎ 0.78⁎⁎⁎ 0.54⁎⁎⁎ 0.41⁎⁎ 0.33⁎⁎
Within file range 801 0.67⁎⁎ 1.60⁎⁎⁎ 1.37⁎⁎⁎ 1.05⁎⁎⁎ 0.68⁎⁎⁎ 0.36⁎⁎⁎ 0.28⁎⁎ 0.26⁎⁎ 0.13
Below file range 409 − 0.28 1.32⁎⁎⁎ 0.88⁎⁎⁎ 0.78⁎⁎⁎ 0.22 0.02 0.07 − 0.05 0.06
All issues: 1999–2000 703 6.09⁎⁎⁎ 2.34⁎⁎⁎ 1.73⁎⁎⁎ 1.04⁎⁎ 0.45 − 0.04 0.05 − 0.04 0.05
Above file range 324 8.13⁎⁎⁎ 3.23⁎⁎⁎ 2.51⁎⁎ 1.96⁎⁎ 0.99 0.28 0.17 − 0.01 0.65
Within file range 261 5.43⁎⁎⁎ 2.25⁎⁎ 1.64⁎ 0.54 0.21 − 0.03 0.29 0.22 − 0.07
Below file range 118 1.95⁎ 0.09 − 0.20 − 0.32 − 0.51 − 0.91⁎ − 0.82⁎ − 0.74⁎ − 0.48
All issues: 2001–2003 180 2.20⁎⁎⁎ 1.51⁎⁎⁎ 1.08⁎⁎⁎ 0.83⁎⁎ 0.67⁎⁎ 0.37 0.34 0.23 0.04
Above file range 33 2.78⁎ 1.78⁎ 1.74⁎ 2.11⁎ 1.78⁎ 1.60 1.23 0.66 0.00
Within file range 106 1.94⁎ 1.17⁎ 0.95⁎ 0.51 0.27 − 0.01 0.20 0.24 − 0.03
Below file range 41 2.42⁎ 2.17⁎ 0.86⁎ 0.66 0.78 0.37 − 0.05 − 0.14 − 0.26

Panel B: hot and cold IPOs based on offer-to-open quartiles

All issues: 1993–2003 2531 2.35⁎⁎⁎ 1.79⁎⁎⁎ 1.40⁎⁎⁎ 1.01⁎⁎⁎ 0.58⁎⁎⁎ 0.26⁎⁎ 0.21⁎⁎ 0.18⁎⁎ 0.13⁎⁎
“Hot IPOs” (Q1) 635 4.84⁎⁎⁎ 2.09⁎⁎⁎ 1.85⁎⁎⁎ 1.31⁎⁎ 0.72 0.28 0.24 0.04 0.48⁎⁎
“Cold IPOs” (Q4) 634 1.16⁎⁎⁎ 1.00⁎⁎⁎ 0.60⁎⁎ 0.48⁎ 0.10 0.02 0.05 − 0.06 − 0.05
All issues: 1993–1998 1648 0.75⁎⁎⁎ 1.59⁎⁎⁎ 1.30⁎⁎⁎ 1.02⁎⁎⁎ 0.62⁎⁎⁎ 0.38⁎⁎⁎ 0.30⁎⁎⁎ 0.22⁎⁎⁎ 0.16⁎⁎⁎
“Hot IPOs”(Q1) 267 1.12⁎⁎ 1.37⁎⁎ 1.56⁎⁎⁎ 0.92⁎⁎ 0.66⁎ 0.67⁎ 0.33 0.17 0.42
“Cold IPOs” (Q4) 395 0.95⁎⁎⁎ 0.91⁎⁎⁎ 0.52⁎⁎⁎ 0.59⁎⁎⁎ 0.05 − 0.13 − 0.13 − 0.19⁎ − 0.03
All issues: 1999–2000 703 6.09⁎⁎⁎ 2.34⁎⁎⁎ 1.73⁎⁎⁎ 1.04⁎⁎ 0.45 − 0.04 0.05 − 0.04 0.05
“Hot IPOs” (Q1) 355 7.77⁎⁎⁎ 2.72⁎⁎⁎ 2.11⁎⁎ 1.59⁎ 0.72 − 0.09 − 0.10 − 0.11 0.50
“Cold IPOs” (Q4) 166 1.69⁎⁎⁎ 1.38⁎⁎ 0.88 0.39 0.32 0.45 0.51 0.31 − 0.25
All issues: 2001–2003 180 2.20⁎⁎⁎ 1.51⁎⁎⁎ 1.08⁎⁎⁎ 0.83⁎⁎ 0.67⁎⁎ 0.37 0.34 0.23 0.04
“Hot IPOs” (Q1) 13 1.59 0.30 0.87 1.45 2.09⁎ 2.12⁎ 2.01⁎ 0.36 1.82
“Cold IPOs” (Q4) 73 1.01 0.53 0.36 0.08 − 0.09 − 0.14 0.04 − 0.04 0.17

Panel C: beta (β)

All issues: 1993–2003 2531 2.35⁎⁎⁎ 1.79⁎⁎⁎ 1.40⁎⁎⁎ 1.01⁎⁎⁎ 0.58⁎⁎⁎ 0.26⁎⁎ 0.21⁎⁎ 0.18⁎⁎ 0.13⁎⁎
Beta (β) ≥ 1 1274 4.06⁎⁎⁎ 2.54⁎⁎⁎ 1.94⁎⁎⁎ 1.40⁎⁎⁎ 0.85⁎⁎⁎ 0.37⁎ 0.29⁎ 0.13⁎ 0.15⁎⁎
Beta (β) b 1 1257 0.62⁎⁎ 1.07⁎⁎⁎ 0.90⁎⁎ 0.65⁎⁎⁎ 0.31⁎⁎ 0.16 0.07 0.09 0.13⁎
All issues: 1993–1998 1648 0.75⁎⁎⁎ 1.59⁎⁎⁎ 1.30⁎⁎⁎ 1.02⁎⁎⁎ 0.62⁎⁎⁎ 0.38⁎⁎⁎ 0.30⁎⁎⁎ 0.22⁎⁎⁎ 0.16⁎⁎⁎
Beta (β) ≥ 1 779 1.16⁎⁎⁎ 1.81⁎⁎⁎ 1.43⁎⁎⁎ 1.10⁎⁎⁎ 0.65⁎⁎⁎ 0.48⁎⁎⁎ 0.37⁎⁎⁎ 0.17 0.20
Beta (β) b 1 869 0.45⁎⁎ 1.44⁎⁎⁎ 1.23⁎⁎⁎ 0.99⁎⁎⁎ 0.61⁎⁎⁎ 0.33⁎⁎⁎ 0.11 0.13 0.11
All issues: 1999–2000 703 6.09⁎⁎⁎ 2.34⁎⁎⁎ 1.73⁎⁎⁎ 1.04⁎⁎ 0.45 − 0.04 0.05 − 0.04 0.05
Beta (β) ≥ 1 462 8.74⁎⁎⁎ 3.68⁎⁎⁎ 2.73⁎⁎⁎ 1.85⁎⁎ 1.11⁎ 0.15 0.13 0.01 0.23
Beta (β) b 1 241 0.77 − 0.24 − 0.20 − 0.54 − 0.92 − 0.51 − 0.51 − 0.15 − 0.11
All issues: 2001–2003 180 2.20⁎⁎⁎ 1.51⁎⁎⁎ 1.08⁎⁎⁎ 0.83⁎⁎ 0.67⁎⁎ 0.37 0.34 0.23 0.04
Beta (β) ≥ 1 44 4.92⁎⁎⁎ 3.38⁎⁎ 2.60⁎⁎ 2.05⁎⁎ 1.63⁎⁎ 2.12⁎ 1.02⁎ 0.70 0.40
Beta (β) b 1 136 1.46⁎⁎ 0.96⁎ 0.63 0.48 0.38 − 0.14 0.20 0.24 0.18

The sample contains 2531 IPOs issued between January 1, 1993 and December 31, 2003. The sample is restricted to IPOs recorded in Thomson Financial's SDC New
Issues Database with an offer price of at least five dollars. We exclude spinoffs, Real Estate Investment Trusts (REITs), unit offers, Savings and Loans, American
Depository Receipts (ADRs), closed end investment funds, and firms not listed in the CRSP or TAQ files. This table provides mean trade-to-close (%) return for the
full sample (1993–2003) and across subsamples for IPOs issued from 1993–1998, 1999–2000, and 2001–2003. Panel A presents the results for the full sample
sorted on file range. An IPO is classified as “above the file range” if the offer price is above the initial file range reported to the SEC. The same logic applies to within
and below file range classifications. Panel B presents results for “Hot” and “Cold” IPOs. An IPO is classified as “Hot” if its offer-to-open return is in the top quartile of
all offer-to-open returns. This equates to an offer-to-open return in excess of 29.16%. An IPO is classified as “Cold” if it is offer-to-open return is in the bottom
quartile of all offer-to-open returns. This equates to an offer-to-open return of less than 2.67%. Panel C presents the results for IPOs with a beta coefficient greater
than or equal to one as compared to those with a beta coefficient less than one. Beta coefficients are calculated as the mean coefficient of the daily market risk
premium as estimated on the daily excess return for the first six months of trading, where the market rate of return is proxied by the CRSP value-weighted index
and the risk-free return is proxied by the six month (26 Week) T-Bill rate. The number of observations, N⁎, is reported for each category declines across the table
due to the time of day when an IPO opens for aftermarket trading. Total Underpricing is the percentage change from the offer price to the last trade/closing price on
the first day of trading. Offer-to-Open is the percentage change from the IPO offer price to the first trade/open price on the first day of trading. Open-to-Close is the
percentage change from the first trade/open price on the first day of trading to the last trade/closing price on the first day of trading. The variables 5-to-Close, 15-
to-Close, 30-to-Close, 60-to-Close, 120-to-Close, 180-to-Close, 240-to-Close, and 300-to-Close Returns are calculated as the percentage change from the last
executed trade price closest within the appropriate window after the issues opens for trading to the last trade/closing price on the first day of trading, respectively.
Prices as well as trade information are collected from the TAQ files. Statistical significance is shown by the use of one (10%), two (5%), or three (1%) stars.

prospectus is positively correlated with price uncertainty. In effect, riskier firms are more difficult to price and aggregate demand
uncertainty increases accordingly. Thus, we use the post-IPO estimated Beta (β) as one proxy for these risk-factors and aggregate
demand uncertainty.
 D.J. Bradley et al. / Journal of Corporate Finance 15 (2009) 316–330 323

As shown in Panel C, we sort each IPO as high or low risk based on whether the calculated beta coefficient is above one, or less than or
equal to one, respectively. Although the sample splits fairly evenly on this partition, there is a large difference between open-to-close
returns for these groups. For instance, for the full sample, high risk IPOs exhibit an open-to-close return of 4.1% compared to only 0.6% for
their low risk counterparts. This pattern of higher open-to-close returns for riskier offers is consistent through each sub-period considered.

4.1.2. Opening-ask to closing-bid returns

While our results in Table 2 are based on actual transaction data, and the calculated returns could overcome typical transaction
costs, it would be interesting to know if a retail investor could profit from these first-day returns in the worst-case scenario where
an investor's order is executed at both extremes of the bid-ask quotes. In Table 3 we examine ask-bid returns where the investor
buys at the opening ask and sells at the closing bid price (00-to-close Ask-Bid Return) or buys at the ask price posted 5 min after
the IPO opens and sells at the closing bid price (5-to-Close Ask-Bid Return).
Panel A of Table 3 sorts these ask-bid returns by file range, Panel B reports the results for “hot” and “cold” IPOs based on Offer-to-
Open quartiles, and Panel C presents the results based on the post-IPO estimated Beta (β). Opening and closing spreads, calculated as
the difference between the posted ask price and bid price divided by the mid-point of the bid-ask prices, are also provided.
The magnitudes of return are necessarily smaller than those presented in Table 2 for transaction-to-transaction returns (and are
statistically indistinguishable from zero for the overall sample), but some striking results remain. As shown, IPOs priced above the
file range (Panel A), “hot” IPOs (Panel B), and IPOs with Betas greater than or equal to one (Panel C) experience statistically and
economically significant ask-bid returns.
The analysis in Table 3 is conditional on an investor buying at the posted ask and selling at the posted bid quotes, which as
suggested above, is the absolute worst-case scenario for an investor. To investigate the proportion of transactions that actually
execute at the posted quotes, we examine the 2480 observations where bid-ask spreads are available at the time of the opening
and closing transaction on the first trading day in Table 4.
As shown in Table 4, only 41% of opening transactions occur at the posted ask price. Of those IPOs which open at the ask price,
over a third rank in the bottom quartile of the open-to-close transaction-based returns reported in Table 2. Just over 31% open at
the posted bid price, and the remaining 28% of opening transactions occur inside the posted bid-ask spread.
Turning to closing prices, 24% of closing transactions occur at the posted ask price, 51% of closing transactions occur at the
posted bid price, and the remaining 25% of closing transactions occur inside the posted bid-ask spread. No significant pattern is
evident in the transaction classifications segmented by open-to-close quartiles.
Finally, in the third part of Table 4 we examine round-trip transactions. Almost 45% of the IPOs had either an opening or closing
transaction inside the spreads. Furthermore, only 22% of IPOs had their first transaction at the opening ask price and their last
transaction at the closing bid price. Moreover, this worst case scenario is concentrated in the lowest quartile of open-to-close
returns. Thus, while the ask-bid returns presented in Table 3 are possible, only one-fifth of our sample falls into this category, and
conditional on this sample, most tend to be “cold” IPOs.

4.2. OLS models

We first begin our regression analysis with a model of total underpricing to ensure our sample is representative and comparable to
other IPO studies. Here, underpricing, as typically defined, is the percentage change from the offer price to the last trade/closing price on
the first day of trading. We next dissect total underpricing into the transaction-based offer-to-open return and open-to-close return in
the following model.

Return1 = β0 + β1 Venture Capitali + β2 Overhangi + β3 Techi + β4 Partiali + β5 Reputationi + β6 Nasdaqi ð1Þ

+ β7 Morning i + β8 Market Lagi + β9 Log Sizei + β10 Agei + β11 Index Std: Dev:i + β12 Betai + ei;

where Return is one of the three return sets described above.

Venture Capital is a binary variable equal to one if the issuing firm is venture-capital backed, zero otherwise. Mixed results have
been found based on the relation between venture-capital backing and underpricing. Megginson and Weiss (1991) find an inverse
relation between underpricing and venture capital, but Lee and Wahal (2004) and Loughran and Ritter (2004) find a positive
relation. Overhang is the number of shares retained by insiders divided by the number of shares offered in the IPO. Bradley and
Jordan (2002) find that overhang is positively related to underpricing.
Based on the results of Loughran and Ritter (2004) and Ljungqvist and Wilhelm (2003), high-tech firms are more significantly
underpriced than their non-tech counterparts; therefore, we include a binary variable (Tech) equal to one if the issuing firm's business
is in a high-tech industry, zero otherwise. Following Hanley (1993) and others, Partial is the percentage change from the mid-point of
the original file range to the offer price. Loughran and Ritter (2004) find that higher-quality underwriters, as measured by Carter and
Manaster (1990) rankings, are more likely to underprice IPOs; therefore, we include the Carter-Manaster reputation ranking of the lead
underwriter of the IPO (Reputation). Other variables also found to be significant in Loughran and Ritter (2004) or Aggrawal and Conroy
(2000) include an indicator variable controlling for the exchange of listing (Nasdaq), the time of day when trading begins (Morning),
and the cumulative return of the Nasdaq composite 15 days prior to the IPO date (Market Lag).
As noted earlier, returns may be higher for IPOs that are harder to price, especially when markets are more volatile and there is
more uncertainty about aggregate demand. As argued by Lowry et al. (2008), Log Size and Age may serve as proxies for firms that
are more difficult to price due to greater information asymmetry. Since pricing uncertainty may also be higher during more volatile
324 D.J. Bradley et al. / Journal of Corporate Finance 15 (2009) 316–330

Table 3
Univariate sorts: intraday ask-to-closing bid returns and spreads.

N⁎ 00-to-close ask-bid return (%) 5-to-close ask-bid return (%) Opening spread (%) Closing-spread (%)
Panel A: file range
All issues: 1993–2003 2480 − 0.07 − 0.18 2.69 1.77
Above file range 781 2.10⁎⁎⁎ 1.19⁎⁎ 1.76 1.20
Within file range 1139 − 0.63⁎ − 0.40 2.95 1.89
Below file range 560 − 1.96⁎⁎⁎ − 1.61 3.47 2.32
All issues: 1993–1998 1624 − 1.59⁎⁎⁎ − 0.97⁎⁎⁎ 3.85 2.38
Above file range 434 − 0.05 0.04 2.89 1.80
Within file range 786 − 1.74⁎⁎⁎ − 0.99 4.02 2.43
Below file range 404 − 2.95⁎⁎⁎ − 2.01 4.55 2.88
All issues: 1999–2000 685 3.34⁎⁎⁎ 1.71⁎⁎ 0.43 0.50
Above file range 316 5.19⁎⁎⁎ 2.93 0.27 0.36
Within file range 253 2.35⁎ 1.36⁎ 0.54 0.56
Below file range 116 0.47 − 0.80 0.62 0.75
All issues: 2001–2003 171 0.71 0.13 0.86 1.13
Above file range 31 0.89 0.36 1.35 1.34
Within file range 100 0.55 0.02 0.68 1.05
Below file range 40 1.00 0.26 0.92 1.17

Panel B: hot and cold IPOs based on offer-to-open quartiles

All issues: 1993–2003 2480 − 0.07 − 0.18 2.69 1.77
“Hot IPOs” (Q1) 617 2.51⁎⁎⁎ 1.48⁎⁎ 1.42 0.96
“Cold IPOs” (Q4) 1863 − 0.93⁎⁎⁎ − 0.72⁎⁎⁎ 3.12 2.04
All issues: 1993–1998 1624 − 1.59⁎⁎⁎ − 0.97⁎⁎⁎ 3.85 2.38
“Hot IPOs”(Q1) 259 − 0.32 − 0.08 2.81 1.77
“Cold IPOs” (Q4) 1365 − 1.83⁎⁎⁎ − 1.14⁎⁎⁎ 4.04 2.49
All issues: 1999–2000 685 3.34⁎⁎⁎ 1.71⁎⁎ 0.43 0.50
“Hot IPOs” (Q1) 345 4.77⁎⁎⁎ 2.81⁎⁎ 0.37 0.34
“Cold IPOs” (Q4) 340 1.90⁎⁎ 0.61 0.48 0.66
All issues: 2001–2003 171 0.71 0.13 0.86 1.13
“Hot IPOs” (Q1) 13 − 0.60 − 1.26 1.51 1.40
“Cold IPOs” (Q4) 158 0.82 0.25 0.80 1.11

Panel C: beta (β)

All issues: 1993–2003 2480 − 0.07 − 0.18 2.69 1.77
Beta (β) ≥ 1 1247 1.44⁎⁎⁎ 0.78⁎⁎ 2.38 1.56
Beta (β) b 1 1233 − 1.60⁎⁎⁎ − 1.14⁎⁎⁎ 3.02 1.98
All issues: 1993–1998 1624 − 1.59⁎⁎⁎ − 0.97⁎⁎⁎ 3.85 2.38
Beta (β) ≥ 1 755 − 1.10⁎⁎⁎ − 0.59⁎⁎ 3.70 2.28
Beta (β) b 1 869 − 2.03⁎⁎⁎ − 1.30⁎⁎⁎ 3.98 2.46
All issues: 1999–2000 685 3.34⁎⁎⁎ 1.71⁎⁎ 0.43 0.50
Beta (β) ≥ 1 453 5.54⁎⁎⁎ 3.10⁎⁎⁎ 0.30 0.40
Beta (β) b 1 232 − 0.95 − 1.01 0.67 0.69
All issues: 2001–2003 171 0.71 0.13 0.86 1.13
Beta (β)1 39 2.96⁎ 1.44⁎ 0.94 1.24
Beta (β) b 1 132 0.05 −0.25 0.83 1.10

The sample contains 2531 IPOs issued between January 1, 1993 and December 31, 2003. The sample is restricted to IPOs recorded in Thomson Financial's SDC New Issues
Database with an offer price of at least five dollars. We exclude spinoffs, Real Estate Investment Trusts (REITs), unit offers, Savings and Loans, American Depository Receipts
(ADRs), closed end investment funds, and firms not listed in the CRSP or TAQ files. This table provides mean trade-to-close (%) return full sample (1993–2003) and across
subsamples for IPOs issued from 1993–1998,1999–2000, and 2001–2003. Panel A presents the results for the full sample sorted on file range. An IPO is classified as “above
the file range” if the offer price is above the initial file range reported to the SEC. The same logic applies to within and below file range classifications. Panel B presents the
results for the “Hot” and “Cold” IPOs. An IPO is classified as “Hot” if its offer-to-open return is in the top quartile of all offer-to-open returns. This equates to an offer-to-open
return in excess of 29.16%. An IPO is classified as “Cold” if it is offer-to-open return is in the bottom quartile of all offer-to-open returns. This equates to an offer-to-open
return of less than 2.67%. Panel C presents the results for IPOs with a beta coefficient greater than or equal to one as compared to those with a beta coefficient less than one.
Beta coefficients are calculated as the mean coefficient of the daily market risk premium as estimated on the daily excess return for the first six months of trading, where
the market rate of return is proxied by the CRSP value-weighted index and the risk-free return is proxied by the six month (26 Week) T-Bill rate. The number of
observations, N⁎, is reported for each category declines across the table due to the time of day when an IPO opens for aftermarket trading. 00-to-Close Ask-Bid Return is the
percentage change from the posted ask price at the open on the first day of trading to the posted bid price at the close on the first day of trading, and 5-to-Close Ask-Bid
Return is the percentage change from the posted ask price posted 5 min after the issues opens for trading to the posted bid price at the close on the first day of trading.
Opening Spread and Closing Spread are calculated as the difference between the posted ask price and bid price at the opening and closing, respectively, as a percentage of
the mid-point of the respective spreads at the time the quotes were obtained. Opening, 5-minute, and closing bid-ask quotes are collected from the TAQ files. Statistical
significance is shown by the use of one (10%), two (5%), or three (1%) stars for the return figures only, as all spreads are statistically significant at the 1% level.

markets, we include Index Std. Dev. which measures the ex-post market volatility. In addition, since Hanley and Hoberg (2008)
show that initial IPO returns and price uncertainty are related to the risk factors on an IPO's prospectus, we also include the variable
Beta to proxy for price uncertainty. Finally, we include the Open Spread and Offer-to-Open variables in the Open-to-Close models.
Furthermore, year dummies are included, but not reported, in all models considered.
As shown in Column 1 of Table 5, underpricing is positively related to Overhang, Tech, Partial, Reputation, Nasdaq Lag, and Early
while negatively related to Age and Log Size. These results are consistent with similar studies over the same time period. In the
 D.J. Bradley et al. / Journal of Corporate Finance 15 (2009) 316–330 325

Table 4
Opening and closing trade relation to bid-ask spread.

Transaction classification N Overall Percentage within classification based on offer-to-open return quartiles
percentage (%)
Hot (%) Quartile 2 (%) Quartile 3 (%) Cold (%)
Opening transaction: 2480 100.00
First transaction at ask price 1027 41.41 21.32 26.20 18.70 33.78
First transaction at bid price 770 31.05 23.25 32.34 28.31 16.10
First transaction inside spread 683 27.54 34.40 16.89 21.30 27.41
Closing transaction: 2480 100.00
Last transaction at ask price 605 24.40 34.71 19.83 22.64 22.82
Last transaction at bid price 1261 50.85 21.09 30.68 18.65 29.58
Last transaction inside spread 614 24.75 28.03 20.16 30.55 21.26
Round-trip transaction: 2480 100.00
First at ask & last at bid 536 21.61 19.59 25.75 14.18 40.48
First at ask & last at ask 262 10.56 24.05 28.24 20.61 27.10
First at bid & last at bid 419 16.90 16.95 43.44 22.91 16.70
First at bid & last at ask 153 6.17 33.33 19.61 28.10 18.95
First or last is inside spread 1110 44.76 24.22 29.60 21.97 24.21

The sample contains 2531 IPOs issued between January 1, 1993 and December 31, 2003. The sample is restricted to IPOs recorded in Thomson Financial's SDC New Issues
Database with an offer price of at least five dollars. We exclude spinoffs, Real Estate Investment Trusts (REITs), unit offers, Savings and Loans, American Depository Receipts
(ADRs), closed end investment funds, and firms not listed in the CRSP or TAQ files. This table classifies opening and closing transactions based on the bid-ask quotes at the time
of the transaction. Round-trip transactions are also classified based on the relation between the transaction prices to the bid-ask quotes at the time of the transactions. Offer-to-
Open returns are calculated as the percentage change from the IPO offer price to the first trade/open price on the first day of trading. An IPO is classified as “Hot” if its offer-to-
open return is in the top quartile of all offer-to-open returns. This equates to an offer-to-open return in excess of 29.16%. An IPO is classified as “Cold” if it is offer-to-open return
is in the bottom quartile of all offer-to-open returns. This equates to an offer-to-open return of less than 2.67%. Opening (first) and closing (last) transactions along with their
respective bid-ask quotes are collected from the TAQ files. This table is limited to 2480 observations due to the availability of closing-transaction bid-ask quotes.

Table 5
Multivariate analysis: total underpricing, offer-to-open, and open-to-close.

Variable Total underpricing Offer-to-open return Open-to-close return

1993–2003 1993–1998 1999–2000
2001–2003
Intercept 64.01⁎⁎⁎ 49.02⁎⁎ 13.25⁎ 16.01⁎⁎⁎ 8.93
Venture Capital 2.28 0.87 0.75⁎ − 0.32 4.10⁎⁎
Overhang 1.25⁎⁎⁎ 1.38⁎⁎⁎ 0.07 − 0.03 0.61⁎⁎⁎
Tech 3.02⁎ 3.03⁎ 0.32 − 0.01 0.38
Partial 1.08⁎⁎⁎ 1.01⁎⁎⁎ 0.06⁎⁎⁎ 0.05⁎⁎⁎ 0.08⁎⁎⁎
Reputation 1.45⁎⁎ 1.03⁎ 0.20 0.25 0.23
Log Size − 4.54⁎⁎⁎ − 3.13⁎⁎ − 1.07⁎⁎ − 0.93⁎⁎⁎ − 1.53
Age − 0.07⁎⁎ − 0.06⁎⁎ − 0.01 − 0.02 0.01
Nasdaq 0.20 0.83 0.03 0.19 − 1.57
Morning − 4.90⁎ − 8.53⁎⁎⁎ 2.15⁎⁎⁎ 0.78 3.56⁎⁎
Market Lag 13.46⁎⁎⁎ 13.28⁎⁎⁎ 0.14 0.40 − 0.42
Index Std. Dev. 14.20⁎⁎⁎ 11.12⁎⁎⁎ 2.26⁎⁎ 1.24 8.31⁎
Beta 7.31⁎⁎⁎ 5.23⁎⁎⁎ 1.71⁎⁎⁎ 0.76⁎⁎⁎ 4.42⁎⁎⁎
Open Spread − 0.19 − 0.20⁎⁎ − 0.45
Offer-to-Open − 0.04⁎⁎⁎ − 0.04⁎⁎⁎ − 0.05⁎⁎⁎
Observations 2531 2531 2531 1828 703
Adjusted R2 (%) 49.74 46.47 5.76 3.24 5.31

The sample contains 2531 IPOs issued between January 1, 1993 and December 31, 2003. The sample is restricted to IPOs recorded in Thomson Financial's New Issues
Database (SDC) with an offer price of at least five dollars. We exclude spinoffs, Real Estate Investment Trusts (REITs), unit offers, Savings and Loans, American Depository
Receipts (ADRs), closed end investment funds, and firms not listed in the CRSP file. This table provides OLS regression results for the following dependent variables: Total
Underpricing is the percentage change from the offer price to the last trade/closing price on the first day of trading; Offer-to-Open is the percentage change from the IPO
offer price to the first trade/open price on the first day of trading; and Open-to-Close is the percentage change from the first trade/open price on the first day of trading to
the last trade/closing price on the first day of trading. We present results Open-to-Close returns for the full sample (1993–2003), the full sample excluding the bubble
period (1993–1998 and 2001–2003), and the bubble period alone (1999–2000). Venture Capital is a binary variable equal to one if the issuing firm is venture-capital
backed, zero otherwise. Overhang is the number of shares retained by insiders divided by the number of shares offered in the IPO. Tech is a binary variable equal to one if
the issuing firm's business is in a high-tech industry, zero otherwise. Partial is the percentage change from the middle of the original file range to the offer price. Reputation
is the Carter-Manaster reputation ranking of the lead underwriter of the IPO for the year of the IPO. Log Size is the natural logarithm of the offer size of the IPO. Age is the age
of the issuing company in years from its date of incorporation to the date of issue. Nasdaq is a binary variable equal to one if the IPO is listed on Nasdaq, zero otherwise.
Morning is a binary variable equal to one if the IPO opens for secondary market trading prior to noon, zero otherwise. Market Lag is the cumulative return of the Nasdaq
composite for the fifteen days prior to the IPO date. Index Std. Dev. is the daily standard deviation of the CRSP value-weighted index for the six months following the date of
issue. Beta is the mean coefficient of the daily market risk premium as estimated on the daily excess return for the first six months of trading, where the market rate of
return is proxied by the CRSP value-weighted index and the risk-free return is proxied by the six month (26 Week) T-Bill rate. Open Spread is the bid-ask spread as a
percentage of the midpoint of the bid-ask spread posted at the time the time of the first aftermarket trade. Offer-to-Open is the percentage change from the IPO offer price
to the first trade/open price on the first day of trading. Year of offering dummy variables are included, but not reported. We calculate the p-value for each coefficient
estimate using White's (1980) heteroskedasticity-consistent standard errors (HCSEs). Statistical significance is shown by the use of one (10%), two (5%), or three (1%)
stars. Offer prices are obtained from SDC. Transaction data, opening prices, closing prices, and other intraday information is collected from TAQ. Daily returns and volatility
measures on the Nasdaq market index and the CRSP value-weighted index are collected from the Center for Research in Securities Prices (CRSP) file. T-Bill returns are
obtained from the Federal Reserve Bank of St. Louis FRED® database. Carter-Manaster Underwriter Reputation Rankings are collected from Jay Ritter's IPO website.
326 D.J. Bradley et al. / Journal of Corporate Finance 15 (2009) 316–330

next column the dependent variable is offer-to-open return. In general, the same variables that were shown to be important
predictors of underpricing appear to also influence offer-to-open returns in the same direction with similar levels of significance.
Consistent with the Benveniste and Spindt's (1989) partial adjustment phenomenon, much of the reward for revealing truthful
information to the bookrunner is revealed at the first trade.
Of particular interest in this study are the three columns reporting coefficients for open-to-close returns. We first examine
results for the full sample in Column 3 before segmenting the sample into two sub-periods: Column 4 eliminates 1999–2000 to
ensure the bubble-period is not entirely driving the results, and Column 5 focuses only on the 1999–2000 time period.14
We find that Beta is positive and significant, and offer-to-open return is negative and significant for all three models. Similarly, the
results indicate that market participants experience higher open-to-close returns when market volatility is higher, particularly during
the 1999–2000 bubble period. IPOs that open before noon are associated with lower total underpricing, but they experience higher
open-to-close returns. Size is negatively related to open-to-close returns for the full sample and sample excluding 1999–2000.
Even after controlling for other joint effects, we find that Partial is highly significant in all models considered. The coefficient of
0.06 for the full sample indicates that a 10% increase in the offer price with respect to the midpoint of the initial file range will result
in approximately a 60 basis point increase in the open-to-close return.15
In summary, the results from the univariate and multivariate analysis provide evidence that open-to-close returns are much
larger for IPOs with larger offer-to-open returns. Since these “hot” IPOs are unlikely to need price support, this finding casts doubt
on price support as a complete explanation for our results. Likewise, although laddering may have contributed to positive open-to-
close returns before 2000, the persistence after it was explicitly banned makes it at best a partial explanation for our results. Finally,
the negative relation between open-to-close returns and size and the positive relation between open-to-close returns, post-IPO
market volatility, and Beta is at least partially consistent with the asymmetric information and aggregate demand uncertainty
hypothesis. In the next subsection, we turn our attention to microstructure panel models to investigate retail sentiment.

4.3. Panel models

To assess the impact of retail sentiment we calculate trade-to-trade interval returns for each 5-minute interval from the
opening transaction (i.e., 0-to-5, 5-to-10, etc.). The microstructure data across 5-minute intervals provides us with an unbalanced
panel of 152,938 interval observations for 2531 IPOs across 78 possible intervals per trading day (09:30–16:00).16
In each interval we classify the percentage of retail trades (Retail) based on Lee and Radhakrishna (2000) and further classify
each trade as buy-side (Buys) or sell-side initiated based on Lee and Ready (1991). We also control for the bid-ask spread as a
percentage of the mid-point of the bid-ask spread at the beginning of each 5-minute interval (Purchase Spread).
It is likely that the variation in interval returns across IPOs is partially caused by firm-specific unobservable factors, which, if
correlated with the independent variables, can cause pooled OLS regression results to suffer from heterogeneity bias. Accordingly, a
Breusch and Pagan (1980) Lagrange multiplier test rejects the use of pooled OLS. Next, a Hausman's (1978) test is used to determine
where the unobservable heterogeneity is correlated with the independent variables by testing for systematic differences in the
fixed- and random-effects coefficient vectors. We fail to reject the hypothesis, thus the results favor implementation of a random
effects panel model using the contemporaneous spread, percentage of retail trades, and percentage of buy-side volume over each
interval in addition to the cross-sectional variables described previously. These results are presented in Table 6.
The first column of Table 6 presents the full sample results. The variables that are significant in the OLS open-to-close models
continue to be important in this econometric framework using 5-minute interval returns. Partial, Beta, and Venture Capital are
positive and significant. Offer-to-Open and Purchase Spread are negative and significant such that large primary market returns and
wide spreads limit the potential for aftermarket participants.
The percentage of buy-side trades (Buys) is positively related to contemporaneous returns. This is not surprising since buy-initiated
trades are indicative of more demand and thus the IPO should post higher returns. We also find that the contemporaneous percentage
of buy-side trades (Buys) and retail purchases (Retail) are positive and significant at all conventional levels. In terms of economic
significance, the coefficient of 0.0016 on Retail evaluated at the mean of 36% would equate to a 5-minute interval return of 5.76 basis
points, or up to 4.49% return over the first day.17 Thus, this finding is consistent with the view that retail sentiment can drive IPO prices.
In the next two columns, we separate the sample into “hot” and “cold” IPOs as we did in Table 6. As shown, Buys, Retail, and Partial
remain positive and significant for both hot and cold IPOs, and as we saw in Table 6, Beta is highly significant for hot IPOs, but not for
cold IPOs. In fact, the average Beta for hot IPOs is 1.83 as opposed to a mean Beta of 0.82 for cold IPOs. As mentioned previously, Beta
may proxy for price uncertainty, but due to the lack of significance in cold IPOs, it may simply be a proxy for unobserved firm-specific
characteristics in hot IPOs.
A few other control variables are also significant and worth noting. For example, morning (Morning) openings are predictive of higher
intraday returns for cold IPOs, but the timing of the opening does not appear to impact the aftermarket return for hot IPOs. In fact, the sign
is negative for hot IPOs, albeit not significant. Interestingly, the offer-to-open return is negatively related to open-to-close returns for hot
IPOs, but positive and significant for cold IPOs.

14
If laddering can fully explain our findings then we would not expect significant results on our variables of interest once the bubble-period period is eliminated.
However, as shown in Column 4, the results remain fairly robust.
15
As mentioned previously, Lowry et al. (2008) suggest that firms with large positive adjustments in the offer price may face greater aggregate demand
uncertainty, potentially leading to higher secondary market returns.
16
Please note that most IPOs do not open for trading at 09:30; thus, 78 5-minute intervals are not observable for most IPOs.
17
This is based on the potential of 78 5-minute intervals per day, but as noted earlier, most IPOs do not open at 09:30:00.
 D.J. Bradley et al. / Journal of Corporate Finance 15 (2009) 316–330 327

Table 6
Random effects panel model: intraday 5-minute interval returns.

Variable 5-minute interval returns — random effects panel model

Full sample: 1993–2003 Offer-to-open quartiles

Top quartile “hot” issues Bottom quartile “cold” issues

Intercept − 0.1864 − 0.6696 − 0.2542
Venture Capital 0.0259⁎⁎ 0.0558 0.0172
Overhang − 0.0004 − 0.0029 − 0.0025
Tech 0.0014 − 0.0207 0.0106
Partial 0.0011⁎⁎⁎ 0.0016⁎⁎ 0.0011⁎
Reputation 0.0041 0.0089 − 0.0022
Log Size − 0.0053 − 0.0009 0.0038
Age 0.0001 0.0009 0.0001
Nasdaq − 0.0004 − 0.0007 − 0.0133
Morning 0.0066 − 0.0015 0.0657⁎⁎
Market Lag − 0.0119 − 0.0072 − 0.0225
Index Std. Dev. 0.0071 0.0982 0.0172
Beta 0.0242⁎⁎⁎ 0.0559⁎⁎⁎ 0.0017
Offer-to-Open − 0.0075⁎⁎⁎ − 0.0011⁎⁎⁎ 0.0065⁎⁎
Purchase Spread − 0.0241⁎⁎⁎ − 0.0231 0.0152⁎⁎
Buys 0.0066⁎⁎⁎ 0.0103⁎⁎⁎ 0.0032⁎⁎⁎
Retail 0.0016⁎⁎⁎ 0.0045⁎⁎⁎ 0.0014⁎⁎⁎
Observations 152,938 32,486 31,753
IPO groups 2531 635 634
Wald chi-square 371.60⁎⁎⁎ 171.89⁎⁎⁎ 98.44⁎⁎⁎

The sample contains 2531 IPOs issued between January 1, 1993 and December 31, 2003. The sample is restricted to IPOs recorded in Thomson Financial's SDC New
Issues Database with an offer price of at least five dollars. We exclude spinoffs, Real Estate Investment Trusts (REITs), unit offers, Savings and Loans, American
Depository Receipts (ADRs), closed end investment funds, and firms not listed in the CRSP or TAQ files. Five-minute interval returns are calculated as the raw
percentage change over a 5-minute interval (i.e., 0-to-5 or 5-to-10) of aftermarket trading. Venture Capital is a binary variable equal to one if the issuing firm is
venture-capital backed, zero otherwise. Overhang is the number of shares retained by insiders divided by the number of shares offered in the IPO. Tech is a binary
variable equal to one if the issuing firm's business is in a high-tech industry, zero otherwise. Partial is the percentage change in the offer price relative to the
midpoint of the initial file range. Reputation is the Carter-Manaster reputation ranking of the lead underwriter of the IPO for the year of the IPO. Log Size is the
natural logarithm of the offer size of the IPO. Age is the age of the issuing company in years from its date of incorporation to the date of issue. Nasdaq is a binary
variable equal to one if the issue was listed on the Nadsaq exchange, zero otherwise. Morning is a binary variable equal to one if the IPO opens for secondary market
trading prior to noon, zero otherwise. Market Lag is the cumulative return of the Nasdaq composite for the fifteen days prior to the IPO date. Index Std. Dev. is the
daily standard deviation of the CRSP value-weighted index for the six months following the date of issue. Beta is the mean coefficient of the daily market risk
premium as estimated on the daily excess return for the first six months of trading, where the market rate of return is proxied by the CRSP value-weighted index
and the risk-free return is proxied by the six month (26 Week) T-Bill rate. Offer-to-Open is the percentage change from the IPO offer price to the first trade/open
price on the first day of trading. Purchase Spread is the bid-ask spread as a percentage of the midpoint of the bid-ask spread posted at beginning of each 5-minute
interval. Retail is the percentage dollar volume over a 5-minute interval classified as retail trades based on the Lee and Radhakrishna (2000) algorithm. Buys is the
percentage dollar volume over a 5-minute interval classified as a buy trade based on the Lee and Ready (1991) algorithm. Year of offering dummy variables are
included, but not reported. We calculate the p-value for each coefficient estimate using White's (1980)) heteroskedasticity-consistent standard errors (HCSEs).
Statistical significance is shown by the use of one (10%), two (5%), or three (1%) stars. Offer prices are obtained from SDC. Transaction data, opening prices, closing
prices, and other intraday trade information is collected from TAQ. Daily returns and volatility measures on the Nasdaq market index and the CRSP value-weighted
index are collected from the Center for Research in Securities Prices (CRSP) file. T-Bill returns are obtained from the Federal Reserve Bank of St. Louis FRED®
database. Carter-Manaster Underwriter Reputation Rankings are collected from Jay Ritter's IPO website.

4.4. Further tests on retail sentiment

As noted in the previous section, we find that the contemporaneous percentage of buy-side trades and retail purchases are
positively correlated to aftermarket returns, and this finding is consistent with the view that retail sentiment is positively
correlated with initial IPO returns. However, such an explanation is complicated by at least two issues. First, institutional
participation can be in the form of small trades, and if so, retail sentiment is not an appropriate explanation. Second, retail demand
in the secondary market could be influenced by the underwriter's allocation choice in the primary market. If retail demand is not
fulfilled in the primary market because the underwriter chooses a low retail allocation relative to subscription, then a retail
investor is forced to buy in the secondary market, but not because of overoptimism.
With these two caveats in mind, if open-to-close returns are in fact driven by overoptimistic retail sentiment investors then one
would expect firms with larger open-to-close returns to more severely underperform in the long-run. Although Ritter (1991)
documents that IPOs with greater underpricing perform poorly in the long-run, we are specifically interested in the relation
between open-to-close returns and long-run performance. Thus, we further investigate the notion of retail sentiment by
examining long-run post-IPO excess returns in Table 7.18
Similar to Ling and Ryngaert (1997), we calculate the excess returns (ERIPO,n) using the following equation:

T 
Y  T 
Y 
ERIPO;T = 1 + RIPO;t − 1 + RMP;t ; ð2Þ
t =1 t =1

18
We thank an anonymous referee for this suggestion.
328 D.J. Bradley et al. / Journal of Corporate Finance 15 (2009) 316–330

Table 7
Multivariate analysis: post-IPO excess returns.

Variable 1-Week 6-Month 1-Year 2-Year 3-Year

Post-IPO Post-IPO Post-IPO Post-IPO Post-IPO
Excess return Excess return Excess return Excess return Excess return
Intercept − 1.55 60.10 75.90 246.62 134.75
Venture Capital 0.62 − 1.02 0.28 25.07⁎⁎ 36.41⁎⁎⁎
Overhang − 0.04 5.03⁎⁎⁎ 5.41⁎⁎⁎ 16.57⁎⁎⁎ 15.84⁎⁎⁎
Tech 0.54 7.98⁎⁎ 10.19⁎⁎ 23.84⁎⁎ − 1.34
Partial − 0.03 − 0.17⁎ 0.05 0.25 − 0.18
Reputation 0.29 2.11⁎ 2.41⁎ 5.54⁎ 8.70⁎⁎
Log Size 0.03 − 4.92⁎ − 5.78⁎ − 19.30⁎⁎ − 17.76⁎
Age 0.02⁎ 0.03 0.16⁎ 0.29⁎ 0.44
Nasdaq − 0.09 − 3.85 − 6.78 − 24.33 − 6.09
Morning − 1.70⁎ 1.55 3.84 13.49 26.11⁎⁎
Market Lag − 0.86 − 25.25⁎⁎ − 19.08⁎⁎ − 10.30 − 10.96
Open Spread −0.04 − 0.01 − 1.39 − 3.07 − 0.08
Offer-to-Open 0.01 − 0.04 − 0.08⁎⁎ − 0.34⁎⁎⁎ − 0.33⁎⁎
Open-to-Close 0.05⁎ 0.26⁎ 0.16 − 0.04 0.82
Observations 2445 2444 2418 2210 1931
Adjusted R2 (%) 0.92 8.42 8.97 13.94 10.40

The sample contains 2531 IPOs issued between January 1, 1993 and December 31, 2003. The sample is restricted to IPOs recorded in Thomson Financial's New Issues
Database (SDC) with an offer price of at least five dollars. We exclude spinoffs, Real Estate Investment Trusts (REITs), unit offers, Savings and Loans, American
Depository Receipts (ADRs), closed end investment funds, and firms not listed in the CRSP file. This table provides OLS regression results for 1-Week, 6-Month, 1-
Year, 2-Year, and 3-Year Post IPO Excess Returns for the IPOs from the close of trading on the first aftermarket trading day through the following 5, 126, 252, 504, and
756 trading days, respectively. All excess returns are calculated as buy-and-hold cum dividend return on the IPO minus the buy-and-hold cum dividend return on a
portfolio of firms matched to the IPO on the basis of size and market-to-book measures, expressed in percentage format. Venture Capital is a binary variable equal
to one if the issuing firm is venture-capital backed, zero otherwise. Overhang is the number of shares retained by insiders divided by the number of shares offered
in the IPO. Tech is a binary variable equal to one if the issuing firm's business is in a high-tech industry, zero otherwise. Partial is the percentage change from the
middle of the original file range to the offer price. Reputation is the Carter-Manaster reputation ranking of the lead underwriter of the IPO for the year of the IPO.
Log Size is the natural logarithm of the offer size of the IPO. Age is the age of the issuing company in years from its date of incorporation to the date of issue. Nasdaq
is a binary variable equal to one if the IPO is listed on Nasdaq, zero otherwise. Morning is a binary variable equal to one if the IPO opens for secondary market
trading prior to noon, zero otherwise. Market Lag is the cumulative return of the Nasdaq composite for the fifteen days prior to the IPO date. Open Spread is the bid-
ask spread as a percentage of the midpoint of the bid-ask spread posted at the time the time of the first aftermarket trade. Offer-to-Open is the percentage change
from the IPO offer price to the first trade/open price on the first day of trading. Open-to-Close is the percentage change from the first trade/open price on the first
day of trading to the last trade/closing price on the first day of trading. Year of offering dummy variables are included, but not reported. We calculate the p-value for
each coefficient estimate using White's (1980) heteroskedasticity-consistent standard errors (HCSEs) clustered on IPO month. Statistical significance is shown by
the use of one (10%), two (5%), or three (1%) stars. Offer prices are obtained from SDC. Transaction data, opening prices, closing prices, and other intraday trade
information is collected from TAQ. Daily returns and volatility measures on the Nasdaq market index and the CRSP value-weighted index are collected from the
Center for Research in Securities Prices (CRSP) file. T-Bill returns are obtained from the Federal Reserve Bank of St. Louis FRED® database. Carter-Manaster
Underwriter Reputation Rankings are collected from Jay Ritter's IPO website.

where ERIPO,T represents 1-Week, 6-Month, 1-Year, 2-Year, and 3-Year Post IPO Excess Returns for the IPOs from the close of trading
on the first aftermarket trading day through the following 5, 126, 252, 504, and 756 trading days, respectively. All excess returns are
calculated as buy-and-hold cum dividend return on the IPO (RIPO,t) minus the buy-and-hold cum dividend equally-weighed return
on a portfolio of firms (RMP,t) matched to the IPO on the basis of size and market-to-book deciles, expressed in percentage format.19
We employ a modified version of Eq. (1) to determine the impact of offer-to-open and open-to-close returns on the long-run Post-
IPO excess returns. The model is as follows:

ERIPO;T = β0 + β1 Venture Capitali + β2 Overhangi + β3 Techi + β4 Partiali + β5 Reputationi + β6 Log Sizei + β7 Agei + β8 Nasdaqi ð3Þ
+ β9 Morningi + β10 Market Lagi + β11 Open Spreadi + β12 Offeri − to − Open + β13 Open − to − Closei + εi;

where the dependent variable takes on values for 1-Week, 6-Month, 1-Year, 2-Year, and 3-Year Post IPO Excess Returns calculated
using Eq. (2), and all independent variables remain the same as defined previously in Eq. (1).
As shown in Table 7, several factors appear to influence Post-IPO excess returns, and the results are generally consistent with
prior empirical evidence on IPO long-run returns. For example, consistent with Ritter (1991), we also document a reversal for IPOs
with large offer-to-open returns, comprising the majority of total underpricing. However, as noted previously, if the large open-to-
close returns documented in Table 2 are driven by overly optimistic retail investors, then one would expect that firms with larger
open-to-close returns would more severely underperform in the long-run. In Table 7 we find no evidence for this suggestion in that
the coefficients on Open-to-Close are either positive (in the first week and six months following the IPO) or insignificant (in all
remaining models). This finding casts doubt on the retail sentiment hypothesis.20

19
Using value-weighted portfolios and matching independently on size, market-to-book, or industry deciles provides qualitatively identical results.
20
Other specifications of Eq. (3) were employed; however, the results for any given variable were qualitatively the same in each specification. More importantly,
the coefficient of interest, β13, was not statistically negative in any specification considered.
 D.J. Bradley et al. / Journal of Corporate Finance 15 (2009) 316–330 329

4.5. A note on short-sale constraints

It should be noted that short-sale constraints is another possible explanation for our results. Ofek and Richardson (2003)
suggest that in the face of heterogeneous views about Internet IPO valuations, short sale constraints led to severe overvaluations,
only later to be reversed when lockup expiration releases these constraints. Other papers also make such assumptions about short
sale restrictions in IPOs. If shares are unavailable to short, this could lead to overvaluation because there is no mechanism for
pessimistic investors to trade on their beliefs and therefore the price could rise about its equilibrium value.
Edwards and Hanley (2007) use a proprietary data set and find that IPO short-selling is prevalent, related to positive partial
adjustment effects, and is more pronounced for IPOs with higher underpricing. However, they conclude that it does not appear to
limit underpricing. Again, due to the unavailability of short selling data, we cannot test this hypothesis, but the results in Edwards
and Hanley (2007) suggest it is unlikely that short selling constraints can fully explain the open-to-close findings presented here.
Further, short-sale constraints are likely to be alleviated when the lock-up period expires, and a reversal is likely soon thereafter.
Our analysis in the previous section suggests any reversal is not related to open-to-close returns.

5. Conclusion

Though most IPO studies focus exclusively on total underpricing, we investigate secondary market returns on the first day of
trading during the 1993–2003 period, and we document several important findings. First, open-to-close returns are much larger
than previously documented and potentially exploitable, averaging over 2% during our sample period. Second, the market does not
reach an equilibrium price until approximately 2 h into trading. Third, this effect is persistent over the entire sample period
considered. We consider several non-mutually exclusive explanations for these previously undocumented findings: price support
by the lead underwriter, laddering, retail sentiment, and information asymmetry.
It is well documented that underwriters support the price of “cold” IPOs, thus truncating the left-side of the return distribution.
While one would expect some form of price support for “cold” IPOs, it is very unlikely that “hot” IPOs need price support. However,
we find that hot IPOs, either defined by ex post underpricing or by adjustments from the file range to final offer price, indeed
experience higher secondary market returns than cold IPOs; thus, price support is an unlikely explanation for our results.
While we cannot directly test the implications of laddering, and we acknowledge that it likely played a role in aftermarket
returns, particularly during the bubble period, it too is unlikely a complete explanation because our results are robust during 2001–
2003 when the incentive to ladder was weak due to increasing scrutiny of the practice by the SEC.
Next, we examine the impact of retail sentiment on secondary market returns. We find a strong positive relationship between
the proportion of small trades and open-to-close returns consistent with the view that retail demand and sentiment can push IPO
prices higher, but implicitly this argument assumes that these overoptimistic retail investors would ultimately experience a
reversal. In our long-run post-IPO analysis, we do not find such a reversal; thus our findings on retail sentiment remain mixed at
best.
Finally, we consider information asymmetry as an explanation for our findings. Lowry et al. (2008) argue that information
asymmetry can be in the form of aggregate demand uncertainty, which is unlikely to be resolved until the IPO opens for secondary
market trading. It is more prevalent across firms during more volatile time periods and within firms that pose more information
asymmetry risks, such as smaller firms and high Beta (β) firms. Consistent with this view, we indeed find that open-to-close
returns are negatively related to firm size and positively related to market volatility and Beta, but we caution the reader that Beta
may serve as a proxy for unobservable, firm-specific characteristics, and not aggregate demand uncertainty.

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