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A New Approach for Interpreting Long-Run Returns, Applied to IPO and SEO Stocks

Author

Listed:
  • Jan Bo Jakobsen

    (Nordea Investment Management Strandgade)

  • Torben Voetmann

    (Department of Finance, The Wharton School and Cornerstone Research)

Abstract

In this paper, we introduce a new approach for interpreting long-run returns; which we then test on IPOs and SEOs in Denmark. We demonstrate that by decomposing the mean and volatility components of the expected crosssectional buy-and-hold returns, we can improve the interpretation of long-run returns. Using a traditional method, we found that after five years the buy-and-hold returns of IPO and SEO stocks underperformed the market by 27.3 percent and 21.4 percent, respectively. By applying the new approach we found that after five years the same stocks underperformed by 43.7 percent and 38.1 percent. Although underperformance has long been documented in the empirical literature, we found that the underperformance is larger than previously documented.

Suggested Citation

  • Jan Bo Jakobsen & Torben Voetmann, 2005. "A New Approach for Interpreting Long-Run Returns, Applied to IPO and SEO Stocks," Annals of Economics and Finance, Society for AEF, vol. 6(2), pages 337-363, November.
    • Handle: RePEc:cuf:journl:y:2005:v:6:i:2:p:337-363
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    More about this item

    Keywords

    Wealth relatives; Buy-and-hold returns; Right skewed distributions;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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