Extrapolation Errors in IPOs
Forthcoming in Financial Management
45 Pages Posted: 29 Jun 2011 Last revised: 8 Jan 2015
Date Written: June 28, 2011
We examine the effect of pre-IPO growth rates on the valuation and long-run performance of new issues. IPOs with rapid pre-IPO revenue growth obtain significantly higher offer value and secondary market valuation but have relatively poor long-term stock returns. There is no evidence that performance differentials are due to risk premia. Indeed the high-growth firms are riskier according to traditional measures. Finally, we show that analysts’ forecasts are upwardly biased for all firms, and the magnitude of these biases is greatest for firms with rapid pre-IPO growth. Overall these results are consistent with the behavioral model suggested by Lakonishok, Shleifer and Vishny (1994) and La Porta (1996).
Keywords: Initial Public Offerings, Optimism, Bias, Overreaction
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