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

Annals of Economics and Finance, Vol. 6, No. 2, pp. 337-363, November 2005

27 Pages Posted: 3 Apr 2008

See all articles by Jan Bo Jakobsen

Jan Bo Jakobsen

Invensure

Torben Voetmann

The Brattle Group; University of San Francisco

Date Written: December 1999

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 cross-sectional 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.

Keywords: Wealth relatives, Buy-and-hold returns, Right skewed distributions

JEL Classification: G14, G32

Suggested Citation

Jakobsen, Jan Bo and Voetmann, Torben, A New Approach for Interpreting Long-Run Returns, Applied to IPO and SEO Stocks (December 1999). Annals of Economics and Finance, Vol. 6, No. 2, pp. 337-363, November 2005. Available at SSRN: https://ssrn.com/abstract=1115907 or http://dx.doi.org/10.2139/ssrn.1115907

Jan Bo Jakobsen

Invensure ( email )

Netherlands

Torben Voetmann (Contact Author)

The Brattle Group ( email )

201 Mission Street
Suite 2800
San Francisco, CA 94105
United States
415-217-1000 (Phone)

HOME PAGE: http://www.brattle.com

University of San Francisco ( email )

2130 Fulton Street
San Francisco, CA 94117
United States

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