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The Persistence of IPO Mispricing and the Predictive Power of Flipping

Author

Listed:
  • Laurie Krigman

    (University of Arizona,)

  • Wayne H. Shaw

    (Cox School of Business, Southern Methodist University,)

  • Kent L. Womack

    (Amos Tuck School, Dartmouth College)

Abstract

This paper examines underwriters' pricing errors and the information content of first-day trading activity in IPOs. We show that first-day winners continue to be winners over the first year, and first-day dogs continue to be relative dogs. Exceptions are "extra-hot" IPOs, which provide the worst future performance. We also demonstrate that large, supposedly informed, traders "flip" IPOs that perform the worst in the future. IPOs with low flipping generate abnormal returns of 1.5 percentage points per month over the first six months beginning on the third day. We show that flipping is predictable and conclude that underwriters' pricing errors are intentional. Copyright The American Finance Association 1999.

Suggested Citation

  • Laurie Krigman & Wayne H. Shaw & Kent L. Womack, 1999. "The Persistence of IPO Mispricing and the Predictive Power of Flipping," Journal of Finance, American Finance Association, vol. 54(3), pages 1015-1044, June.
  • Handle: RePEc:bla:jfinan:v:54:y:1999:i:3:p:1015-1044
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