Explaining the Short- and Long-Term IPO Anomalies in the US by R&D

Abstract

Financial scholars who research the initial underpricing and long-term underperformance of IPOs generally attribute these phenomena to information asymmetry and investors' misevaluations. Here, we identify, on a sample of 2,696 US IPOs issued during 1980-1995, a widespread source of information asymmetry and valuation uncertainty - the R&D activities of issuers - and document that these activities significantly affect both the initial underpricing of IPOs (R&D is positively correlated with underpricing) and their long-term performance (R&D is positively related to long-term performance). Given the pervasiveness and constant growth of firms' R&D activities in modern economies, our identification of R&D as a major factor affecting IPO's performance contributes to the understanding of this important economic and capital market phenomenon.

Keywords: R&D, IPO's performance, information asymmetry, investor optimism