Hot and cold IPO markets: The case of the Stock Exchange of Mauritius

The aim of this study is to assess the characteristics of the hot and cold IPO markets on the Stock Exchange of Mauritius (SEM). The results show that the hot issues exhibit, on average, a greater degree of underpricing than the cold issues, although the hot issue phenomenon is not a significant driving force in explaining this short-run underpricing. The results are consistent with the predictions of the changing risk composition hypothesis in suggesting that firms going public during hot markets are on average relatively more risky. The findings also support the time adverse selection hypothesis in that the firms’ quality dispersion is statistically different between hot and cold markets. Finally, the study concludes that firms which go public during hot markets do not underperform those going public in cold markets over the longer term.

► There were clear hot and cold IPO markets evident in the Mauritian stock market.
► Hot issues exhibit, on average, a greater degree of underpricing than the cold issues.
► The results are consistent with the predictions of the changing risk composition hypothesis.
► Firms going public during hot markets are on average relatively more risky.
► Firms going public during hot markets underperform more over the longer term.