by Larry Swing - October 2, 2005

Education

An extensive literature exists examining abnormal returns near the expiration of the IPO quiet period.  The literature documents a sizable run-up in the trading days prior to the expiration of the quiet period.  The most common explanation for this run-up is the usually positive analyst initiations that occur subsequent to the quiet period.

A recent study of IPO quiet period returns find interesting results:  Since 2000 (until the last date studied – late 2002), quiet period returns have continued.  They have, however, become substantially smaller.  The average return for buying seven trading days before the quiet period expiration, and selling the day after expiration was 1.59% from January 2001 to July 2002.  The best long-term results from trading this inefficiency were found with stocks that had three or more managing underwriters.

The results suggest that traders have become more active in profiting from this inefficiency, and that this has decreased the size of the inefficiency.

The quiet period lasts 40 calendar days from the IPO date.

Reference:

“The IPO Quiet Period Revisited” by: Daniel J. Bradley, Bradford D. Jordan, Jay R. Ritter, and Jack G. Wolf, Journal of Investment Management Vol. 2, No. 3 (2004), pp. 1-11

Analyses of Sectors and Markets

We are neutral on all sectors and markets this week.