Divergence of Opinion, Uncertainty, and the Quality of Initial Public Offerings

Abstract:     
Using a sample of 2,025 initial public offerings (IPOs) from 1993-1996, we examine the relation between the divergence of opinion among investors and the long-run performance of IPOs. We focus on three opening-day proxies for the uncertainty about an IPO: opening bid-ask spread, the time of first trade, and the flipping ratio. After controlling for issue quality, we find all three variables provide significant predictive ability to explain long-run IPO returns. Specifically, a large opening spread, a late opening trade, and a high flipping ratio are associated with poor long-run returns. Our findings are consistent with Miller (1977), who demonstrates that divergence of opinion leads to both short-run overvaluation and long-run underperformance of IPOs.

Number of Pages in PDF File: 35

Keywords: Initial public offerings, IPOs, Divergence of opinion, Uncertainty, Long-run returns, Flipping, Opening spread, Time of First Trade

JEL Classification: G12, G14, G24, G30, D80

working papers series