The literature offers many explanations for why the IPO market cycles from hot to cold. These include theories in which hot markets represent clusters of IPOs in a new industry, and signaling models that predict that hot markets draw in better quality firms. Others suggest hot market IPOs' stock...

Myers (1984) and Myers and Majluf (1984) posit that asymmetric information problems cause firms to follow a pecking order when choosing the source of funds for new investment. Internal funds are preferred to external funds, and if external funds are obtained, safer instruments will be offered...