Underpricing and Index Excess Returns Dynamics

Abstract:
We study the impact of initial public offerings on index excess returns in secondary markets. Our hypothesis is that initial public offerings raise investors’ attention and, thereby, stimulate investments in secondary markets. We use a theoretical model to demonstrate that these investments should give rise to positive excess returns of already listed shares. We test our hypothesis by using data on the Neuer Markt and the Nouveau Marché. We find a strong link between underpricing of initial public offerings and excess returns in secondary markets.