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Market Underreaction to Free Cash Flows from IPOs

  • Steven X. Zheng
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    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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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6288.2007.00162.x
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    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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