ABSTRACT Both IPO volume and average initial returns are highly autocorrelated. Further, more companies tend to go public following periods of high initial returns. However, we find that the level of average initial returns at the time of filing contains no information about that company's eventual underpricing. Both the cycles in initial returns and the lead‐lag relation between initial returns and IPO volume are predominantly driven by information learned during the registration period. More positive information results in higher initial returns and more companies filing IPOs soon thereafter.

We examine the relation between risk and IPO underpricing and test two aspects of the litigation-risk hypothesis: (1) firms with higher litigation risk underprice their IPOs by a greater amount as a form of insurance (insurance effect) and (2) higher underpricing lowers expected litigation costs (deterrence effect). To adjust for the endogeneity bias in previous studies, we use a simultaneous equation framework. Evidence provides support for both aspects of the litigation-risk hypothesis.