Which, Why, and for How Long Do IPOs Underperform?

50 Pages Posted: 28 Feb 2008

See all articles by Daniel Hoechle

Daniel Hoechle

FHNW School of Business - Institute for Finance; University of Basel - Department of Finance

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

Date Written: February 26, 2008

Abstract

Based on a sample of 7,378 firms going public in the 1975-2005 period, we document a significant underperformance of IPO firms over the first year after going public, while there is virtually no underperformance thereafter. Moreover, by decomposing the Carhart-alpha we find that IPO underperformance, where present, is mainly due to fundamental differences in firm characteristics (e.g., market-to-book ratio, leverage, and R&D expenditures scaled by sales) between IPO companies and more seasoned, non-issuing firms. In fact, our results indicate that IPO firms neither perform materially better nor worse than mature companies with similar firm characteristics. Finally, we show that IPO underperformance is partially predictable. IPOs associated with overly optimistic growth prospects (and correspondingly high valuation levels) and IPOs going public during hot issue periods perform substantially worse than other IPOs.

Keywords: IPO underperformance, anomaly, long-term performance evaluation

JEL Classification: G3, G12, C21

Suggested Citation

Hoechle, Daniel and Schmid, Markus, Which, Why, and for How Long Do IPOs Underperform? (February 26, 2008). Available at SSRN: https://ssrn.com/abstract=1098368 or http://dx.doi.org/10.2139/ssrn.1098368

Daniel Hoechle (Contact Author)

FHNW School of Business - Institute for Finance ( email )

Peter Merian-Strasse 86
Basel, CH-4002
Switzerland
+41 61 279 17 73 (Phone)

University of Basel - Department of Finance ( email )

Peter Merian-Weg 6
Basel, CH-4002
Switzerland

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Unterer Graben 21
St. Gallen, 9000
Switzerland

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Swiss Finance Institute

c/o University of St. Gallen
Dufourstrassse 50
St. Gallen, SG 9000
Switzerland

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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