Investor Optimism, Sales Fixation and Firm Life Cycle
63 Pages Posted: 14 Nov 2012 Last revised: 5 Feb 2014
Date Written: December 25, 2013
We provide novel evidence supporting the view that stock prices of some firms in the early growth stage of their life cycle are set by optimistic investors fixated on sales growth. We identify these firms as those that went public during an industry IPO waves, had high sales growths but low gross margins in the first three years following the IPO. Consistent with overpricing, their stocks under-perform their peers by 0.92% per month during the subsequent four year period on a risk-adjusted basis, suggesting limits to arbitrage. This pattern is unrelated to the well documented long-run under-performance of IPOs.
Keywords: firm life cycle, industry IPO wave, gross margin, growth equilibrium, limits to arbitrage
JEL Classification: G02, G10, G12, G14, G17
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