IPO first-day returns: resilience to monetary policy shocks

PurposeThis research examines the relationship between monetary policy surprises and the first-day returns of Initial Public Offerings (IPOs). The primary objective is to determine whether unexpected changes in the federal funds rate around Federal Open Market Committee (FOMC) announcements impact IPO underpricing.Design/methodology/approachUsing a dataset of IPOs from 2000 to 2020, we leverage the time gap between IPO offer price declarations and FOMC announcements to assess the exogenous impact of monetary policy shocks on first-day IPO returns. Our approach differentiates between anticipated and unanticipated changes in the federal funds rate.FindingsThe results reveal no significant effect of monetary policy surprises on first-day IPO returns, suggesting that IPO investors do not account for monetary policy shocks in their initial pricing decisions. This contrasts with established findings, which we replicate, regarding broader market reactions to FOMC announcements.Originality/valueThis study is the first to examine the specific impact of monetary policy shocks on IPO underpricing, using the timing of IPO price declarations relative to FOMC announcements. This research offers new insights into the resilience of IPO pricing to external shocks, contributing to the broader understanding of underpricing within the behavioral finance framework.