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Market Underreaction to Free Cash Flows from IPOs

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  • Steven X. Zheng
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    Abstract

    I examine the relation between initial public offering (IPO) long-run stock performance and the amount of cash raised by the firm in the offering. I find that IPOs raising more cash have poorer long-run performance. The result is robust to different measurement methods. The evidence suggests that the market underreacts to free cash flow related agency problems in IPOs. Consistent with this interpretation, I find that IPO long-run performance is more sensitive to the new cash raised in the offering if an IPO firm has lower capital expenditure or higher opening bid-ask spread. Copyright 2007, The Eastern Finance Association.

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    Bibliographic Info

    Article provided by Eastern Finance Association in its journal Financial Review.

    Volume (Year): 42 (2007)
    Issue (Month): 1 (02)
    Pages: 75-97

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    Handle: RePEc:bla:finrev:v:42:y:2007:i:1:p:75-97

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    Web page: http://www.easternfinance.org/
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    Cited by:
    1. Bancel, Franck & Kalimipalli, Madhu & Mittoo, Usha R., 2009. "Cross-listing and the long-term performance of ADRs: Revisiting European evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(5), pages 895-923, December.
    2. Hatem Mansali & Florence Labégorre, 2010. "Les performances économiques et boursières à long terme des sociétés introduites en bourse:le cas du marché français (1990-2003)," Revue Finance Contrôle Stratégie, revues.org, vol. 13(2), pages 67-106., June.

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