Investor Optimism, Sales Fixation and Firm Life Cycle

63 Pages Posted: 14 Nov 2012 Last revised: 5 Feb 2014

See all articles by Zhi Da

Zhi Da

University of Notre Dame - Mendoza College of Business

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Jianfeng Shen

UNSW Australia Business School, School of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 25, 2013

Abstract

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

Suggested Citation

Da, Zhi and Jagannathan, Ravi and Shen, Jianfeng, Investor Optimism, Sales Fixation and Firm Life Cycle (December 25, 2013). Available at SSRN: https://ssrn.com/abstract=2175396 or http://dx.doi.org/10.2139/ssrn.2175396

Zhi Da (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Ravi Jagannathan

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
429 Andersen Hall
Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Jianfeng Shen

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

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