Fig. 1. Timeline and price evolution. Panel A describes the actions of the underwriter and the ladderer over time. q_I is the allocation to informed investors. P₀ is the offer price. Panel B depicts the evolution of price over time with and without information momentum. The market's demand curve for the initial public offering (IPO) stock is denoted by D₁, and -b is the slope of the demand function, where b>0. The immediate aftermarket price of the IPO stock with Q₀ shares issued is assumed to be if there is no laddering. With laddering, q_L shares are allocated to ladderers and they buy λq_L additional shares in the aftermarket, reducing the share supply to others by (1+λ)q_L and boosting the immediate aftermarket price to . Without an information momentum effect, when the ladderers sell all their shares at time 2, the market price is equal to . With an information momentum effect, when the ladderers sell all their shares at time 2, the demand curve for the firm's stock has been shifted upward by an amount of to D₂, where M(·) is the information momentum effect function. Therefore, the market price at time 2 becomes .

Fig. 2. Annual average of market-adjusted returns over the first 18 trading days during 1985–2002. Closing prices are from the Center for Research in Security Prices (CRSP) database. The market return is the value-weighted Nasdaq composite (including distributions). The original initial public offering (IPO) sample is from the Thomson Financial database. American Depositary Receipts, units, spinoffs, reverse leveraged buyouts, stocks with an offer price of $5 or less, and stocks that do not have the relevant prices in the CRSP database are eliminated, leaving a final sample of 4,411 IPO stocks during 1985–2002. For year j, the average market-adjusted return over the first 18 trading days after the offer date is measured as , where N_j refers to the total number of IPOs in year j, and M_i,18 and M_i,1 refer to the Nasdaq composite levels (including distributions) on the 18th and the first trading days for stock i, respectively. Although dividends on IPOs are not included, less than 1% of IPOs paid a dividend during the first 18 trading days. (A) Cross-sectional average; (B) time-series average; (C) cold IPOs; (D) tepid IPOs; (E) warm IPOs; (F) hot IPOs; (G) extra-hot IPOs.