Modelling the Behaviour of the New Issue Market

This paper analyses the time-series behaviour of the new issue market in the context of an equilibrium model of demand and supply for IPOs. The model produces testable equations examining the relationship between the number of new issues and the average level of under-pricing, and also incorporates the impact of general market conditions. The model proposes that, first, serial correlation will be evident in both the number of new issues and the average level of under-pricing. Second, market conditions will affect both the number of new issues and the average level of under-pricing. Finally, there will be interactions between the number of new issues and the average level of under-pricing. The key characteristic of the model is the explicit recognition of the delay between the firm's decision to list and the actual listing date. The model is tested using a monthly IPO time-series over the last forty years. The empirical results are generally consistent with the model's predictions.