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Long run underperformance of initial public offerings: an explanation

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Author Info
Miller, Edward M. (University of New Orleans)
Abstract

Initial public offerings, even though risky, typically underperform the indices for the first few years after offering. This can be explained by high divergence of opinion raising the initial market price, and by this divergence of opinion declining over time. With time, the valuation of the price setting marginal investor comes closer to the average investor’s valuation. This theory also explains why the firms with the greatest underperformance are those with a short operating history, low sales, low prestige underwriters, low institutional ownership, high volatility, high underpricing at the time of issuance, listing on regional exchanges, and those in certain industries.

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Publisher Info
Paper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 1999-18.

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Length: 24 pages
Date of creation: 06 Feb 2000
Date of revision:
Handle: RePEc:uno:wpaper:1999-18

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Related research
Keywords: Initial public offering (IPO); Investors; Market valuation;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Brav, Alon & Gompers, Paul A, 1997. " Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies," Journal of Finance, American Finance Association, vol. 52(5), pages 1791-1821, December. [Downloadable!] (restricted)
  2. Laura Field, 1995. "Is Institutional Investment in Initial Public Offerings Related to Long-Run Performance of These Firms?," University of California at Los Angeles, Anderson Graduate School of Management 1142, Anderson Graduate School of Management, UCLA. [Downloadable!]
  3. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212. [Downloadable!] (restricted)
  4. Loughran, Tim, 1993. "NYSE vs NASDAQ returns : Market microstructure or the poor performance of initial public offerings?," Journal of Financial Economics, Elsevier, vol. 33(2), pages 241-260, April. [Downloadable!] (restricted)
  5. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March. [Downloadable!] (restricted)
  6. Ajay Shah, 1995. "The Indian IPO Market: Empirical Facts," Finance 9507003, EconWPA. [Downloadable!]
  7. Jain, Bharat A & Kini, Omesh, 1994. " The Post-Issue Operating Performance of IPO Firms," Journal of Finance, American Finance Association, vol. 49(5), pages 1699-1726, December. [Downloadable!] (restricted)
  8. Reena Aggarwal & Ricardo Leal & Leonardo Hernandez, 1993. "The Aftermarket Performance of Initial Public Offerings in Latin America," Financial Management, Financial Management Association, vol. 22(1), Spring.
  9. Ritter, Jay R, 1991. " The Long-run Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(1), pages 3-27, March. [Downloadable!] (restricted)
  10. Kunz, Roger M. & Aggarwal, Reena, 1994. "Why initial public offerings are underpriced: Evidence from Switzerland," Journal of Banking & Finance, Elsevier, vol. 18(4), pages 705-723, September. [Downloadable!] (restricted)
  11. Randolph P. Beatty & Jay R. Ritter, . "Investment Banking, Reputation and the Underpricing of Initial Public Offerings," Rodney L. White Center for Financial Research Working Papers 2-85, Wharton School Rodney L. White Center for Financial Research.
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  12. Stoll, Hans R. & Curley, Anthony J., 1970. "Small Business and the New Issues Market for Equities," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 5(03), pages 309-322, September. [Downloadable!]
  13. Rajan, Raghuram & Servaes, Henri, 1997. " Analyst Following of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 52(2), pages 507-29, June. [Downloadable!] (restricted)
  14. Finn, Frank J. & Higham, Ron, 1988. "The performance of unseasoned new equity issues-cum-stock exchange listings in Australia," Journal of Banking & Finance, Elsevier, vol. 12(3), pages 333-351, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Maher Kooli & Jean-Marc Suret, 2001. "The Aftermarket Performance of Initial Public Offerings in Canada," CIRANO Working Papers 2001s-52, CIRANO. [Downloadable!]
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