The Effect of Informative Events in a Contingent Claims Pricing Framework: Evidence from IPOs

This paper examines how investors interpret initial public offering (IPO) announcements as informational signals for peer firms in the same industry. Using Merton's (1974) contingent-claims framework, we analyze abnormal stock and bond price reactions to IPO announcements to distinguish whether investors primarily revise expected firm value or refine uncertainty about firm value. Across a sample of large IPOs, we document positive abnormal bond returns and negative abnormal equity returns, an asymmetric pattern consistent with IPOs reducing uncertainty about peer firms' future value distributions. Post-IPO, peer firms exhibit significant declines in realized and implied volatility, providing empirical support for this interpretation. These results suggest that IPOs convey information about industry conditions that is relevant to both senior and residual claims but is priced differently across security classes. The findings highlight the importance of analyzing debt and equity markets jointly to identify the informational content of IPO spillovers.