Divergence of Opinion, Uncertainty, and the Quality of Initial Public Offerings
University of Iowa
University of Notre Dame
Xuemin Sterling Yan
University of Missouri - Columbia
University of Iowa - Department of Finance
June 7, 2001
University of Notre Dame Working Paper
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, D80working papers series
Date posted: June 15, 2001
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