Pseudo Market Timing and the Long-Run Underperformance of IPOs
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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Volume (Year): 58 (2003)
Issue (Month): 2 (04)
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