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Pseudo Market Timing and the Long-Run Underperformance of IPOs

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Author Info
Paul Schultz (University of Notre Dame)
Abstract

Numerous studies document long-run underperformance by firms following equity offerings. This paper shows that underperformance is very likely to be observed "ex-post" in an efficient market. The premise is that more firms issue equity at higher stock prices even though they cannot predict future returns. "Ex-post", issuers seem to time the market because offerings cluster at market peaks. Simulations based on 1973 through 1997 data reveal that when "ex-ante" expected abnormal returns are zero, median "ex-post" underperformance for equity issuers will be significantly negative in event-time. Using calendar-time returns solves the problem. Copyright (c) 2003 by the American Finance Association.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 58 (2003)
Issue (Month): 2 (04)
Pages: 483-518
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Handle: RePEc:bla:jfinan:v:58:y:2003:i:2:p:483-518

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  1. Dahlquist, Magnus & de Jong, Frank, 2004. "Pseudo Market Timing: Fact or Fiction?," SIFR Research Report Series 24, Institute for Financial Research. [Downloadable!]
  2. Ravi Jagannathan & Ann E. Sherman, 2006. "Why Do IPO Auctions Fail?," NBER Working Papers 12151, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Malcolm P. Baker & Ryan Taliaferro & Jeffrey Wurgler, 2004. "Pseudo Market Timing and Predictive Regressions," NBER Working Papers 10823, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Matthew Pritsker, 2006. "A fully-rational liquidity-based theory of IPO underpricing and underperformance," Finance and Economics Discussion Series 2006-12, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. Eckbo, B Espen & Norli, Øyvind, 2005. "Liquidity Risk, Leverage and Long-Run IPO Returns," CEPR Discussion Papers 4832, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Abhay Abhyankar & Keng-Yu Ho & Huainan Zhao, 2005. "Long-run post-merger stock performance of UK acquiring firms: a stochastic dominance perspective," Applied Financial Economics, Taylor and Francis Journals, vol. 15(10), pages 679-690, June. [Downloadable!] (restricted)
  7. Erica X. N. Li & Dmitry Livdan & Lu Zhang, 2006. "Optimal Market Timing," NBER Working Papers 12014, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Michael Stolpe, 2004. "Non-Market Interaction in Primary Equity Markets: Evidence from France and Germany," Kiel Working Papers 1211, Kiel Institute for the World Economy. [Downloadable!]
  9. Jean Helwege & Christo Pirinsky & René M. Stulz, 2005. "Why Do Firms Become Widely Held? An Analysis of the ynamics of Corporate Ownership," NBER Working Papers 11505, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Nicholas Barberis & Ming Huang, 2007. "Stocks as Lotteries: The Implications of Probability Weighting for Security Prices," NBER Working Papers 12936, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Lily Qiu & Gerard Hoberg, 2006. "Growth to Value: A Difficult Journey for IPOs and Concentrated Industries," Working Papers 2005-17, Brown University, Department of Economics. [Downloadable!]
  12. Pástor, Luboš & Veronesi, Pietro, 2003. "Stock Prices and IPO Waves," CEPR Discussion Papers 4002, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  13. Miglo, A., 2006. "Debt-Equity Choice As a Signal of Earnings Profile Over Time," Working Papers 2006-7, University of Guelph, Department of Economics. [Downloadable!]
    Other versions:
  14. Doran, James & Jiang, Danling & Peterson, David, 2007. "Short-Sale Constraints and the Idiosyncratic Volatility Puzzle: An Event Study Approach," MPRA Paper 4995, University Library of Munich, Germany, revised 02 Feb 2009. [Downloadable!]
  15. Evgeny Lyandres & Le Sun & Lu Zhang, 2005. "Investment-Based Underperformance Following Seasoned Equity Offerings," NBER Working Papers 11459, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Miglo, Anton, 2006. "Debt-equity choice as a signal of profit profile over time," MPRA Paper 1283, University Library of Munich, Germany. [Downloadable!]
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