Leaders and followers in hot IPO markets

- We develop a simple model of a going public decision within an IPO wave.
- In a separating equilibrium, firms with better growth opportunities go public early and may have to underprice their shares.
- IPOs of low growth firms tend to be delayed within the wave and are not underpriced.
- Theoretical predictions are verified using a large-sample empirical analysis.
- Early movers experience higher underpricing, invest more as well as exhibit a higher sales growth and profitability.

We model the dynamics of going public within an IPO wave. The model predicts that firms with better growth opportunities can find it optimal to go public early and accept underpricing of their issues to signal quality. Data supports this prediction as, on average, early movers underprice their issues significantly more and we show that leaders (early movers with high underpricing) obtain much higher valuations when going public than other IPO firms. Furthermore, after going public, leaders invest significantly more, their sales grow faster, and their profitability remains higher compared to other IPO firms.