A Theory of IPO Waves

In the IPO market, investors coordinate on acceptable IPO pricebased on the performance of past IPOs, and this generates anincentive for investment banks to produce information aboutIPO firms. In hot periods, the information produced by investmentbanks improves the quality of IPO firms, and this allows exante low quality firms to go public and increases the secondarymarket price, thus synchronizing high IPO volumes and high firstday returns. When investment banks behave asymmetrically ininformation production, the "reputations" of investment banksare interpreted as a form of market segmentation to economizeon the social cost of information production.