Abnormal returns on asset exchanges.

Abstract

Asset exchanges, such as mergers and acquisitions, typically give rise to abnormal returns. This dissertation tests a fads hypothesis for abnormal returns on initial public offerings, an asset exchange in which traders exchange cash for issuers' new shares. Initial public offerings, or IPOs, exhibit positive abnormal returns on the date of the exchange when trading prices, on average, rise above offering prices. IPOs also exhibit negative abnormal returns after the exchange as trading prices, on average, fall relative to those on comparable-risk assets. In the fads hypothesis, IPOs occur when a fad, or mass psychogical movement, induces traders to bid the trading prices of certain types of assets up over their intrinsic prices. These high trading prices offer a quasi-arbitrage opportunity that motivates unaffected traders to short-sell seasoned shares affected by the fad or issue new shares based on like assets. For the fads hypothesis to explain abnormal returns on IPOs, fads among traders must allow price bubbles to persist long enough for rational traders to issue IPOs, and rational traders must actually do so. This dissertation's experimental spot asset double auction markets show that the duration of price booms, or rising differences between trading prices and intrinsic prices, significantly increases with an increase in asset life, suggesting that differences between trading prices and intrinsic prices can persist. This laboratory finding parallels field findings that closed-end fund trading prices only converge to net asset values (an intrinsic price proxy) when secondary trading ceases due to merger, liquidation or open-ending. This finding is consistent with bubbles persisting long enough for quasi-arbitrage responses. This dissertation also shows that an apparent fad in closed-end country funds led issuers and underwriters to organize an extraordinary number of IPOs in late 1989 and early 1990. These issuers profited by promising to purchase assets at net asset values and selling shares based on that promise at a premium. The shares issued during this apparent fad had positive abnormal returns in their initial rise from offering prices to trading prices, and subsequently had negative abnormal returns as their premium trading prices fell to discounts. This closed-end country fund findings are consistent with the fads hypothesis of abnormal returns on IPO asset exchanges.