This paper examines the pricing of Initial Public Offerings (IPOs) in the secondary market on the first day of aftermarket trading. The focus of this study is on shifts in average returns over time, and does not necessarily address the cross‐sectional implications of a risk/return relation. The focus of the study is to examine the reasonableness of first day trading prices of IPOs. Initial returns of IPOs, issued during the period, January 1, 1999 to June 30, 2000, reached as much as 800 per cent, and the average initial return for the study sample was of 76 per cent. An important question is whether the high initial returns, observed during this time period, are appropriate for the level of risk associated with these new issues. Related to this question is the pricing of these securities by investment bankers (i.e. the offer price) and the pricing of the securities in aftermarket trading (i.e the secondary market). The results of this study indicate the presence of speculative excesses in the initial pricing of IPOs in aftermarket trading during 1999 and part of 2000. Further there is no indication that IPOs are excessively underpriced by investment bankers during the study period, January 1, 1997 through June 30, 2000. The results of this study may be useful to investors in making decisions about purchasing new public securities in the secondary market.
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