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Extrapolation Errors in IPOs

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  • Ying Xiao
  • Chris Yung

Abstract

type="main"> We demonstrate that relatively high revenue growth prior to an initial public offering (IPO) is associated with high IPO prices and poor returns. In particular, low-growth IPO returns, −1% on a three-year annualized basis compared to −12% (equal-weighted) or −29% (value-weighted) for high-growth new issues. There is no evidence that the performance differentials reflect risk premia. Rather, low-growth firms’ returns are more stable over time. Finally, while analysts’ forecasts are upwardly biased for all firms, the magnitude of this bias is greatest for firms with rapid pre-IPO revenue growth. Overall, these results are consistent with the extrapolation errors model suggested by Lakonishok, Shleifer, and Vishny (1994).

Suggested Citation

  • Ying Xiao & Chris Yung, 2015. "Extrapolation Errors in IPOs," Financial Management, Financial Management Association International, vol. 44(4), pages 713-751, October.
    • Handle: RePEc:bla:finmgt:v:44:y:2015:i:4:p:713-751
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    Cited by:

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    2. Cécile Carpentier & Jean‐Marc Suret, 2018. "Three Decades of IPO Markets in Canada: Evolution, Risk and Return," Accounting Perspectives, John Wiley & Sons, vol. 17(1), pages 123-161, March.
    3. Elizabeth Blankespoor & Bradley E. Hendricks & Gregory S. Miller, 2017. "Perceptions and Price: Evidence from CEO Presentations at IPO Roadshows," Journal of Accounting Research, Wiley Blackwell, vol. 55(2), pages 275-327, May.
    4. Cécile Carpentier & Jean-Marc Suret, 2018. "Entrepreneurs and Junior Markets: An Assessment," CIRANO Working Papers 2018s-18, CIRANO.
    5. Que, Jiangjing & Zhang, Xueyong, 2019. "Pre-IPO growth, venture capital, and the long-run performance of IPOs," Economic Modelling, Elsevier, vol. 81(C), pages 205-216.
    6. Salim Chahine & Gonul Colak & Iftekhar Hasan & Mohamad Mazboudi, 2020. "Investor relations and IPO performance," Review of Accounting Studies, Springer, vol. 25(2), pages 474-512, June.

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