Busted Ipos and Windows of Misopportunity

53 Pages Posted: 14 Feb 2001

See all articles by Craig M. Lewis

Craig M. Lewis

Vanderbilt University - Finance

James K. Seward

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Lynn Foster-Johnson

Dartmouth College - Tuck School of Business

Date Written: April 2000

Abstract

After the first day of public trading, the long run return performance of initial public offerings ('IPOs') is poor relative to a sample of matching firms. We provide evidence from a large sample of IPOs during 1988-1995 in support of the theory that failure rates are inefficiently priced during the going public process. During the sample period, all of the poor long run performance of IPO firms is accounted for by a relatively small number of issuers subsequently delisted for reasons related to poor operating performance ('busted' IPOs). Investment banks establish offer prices at a level that fails to compensate investors for the likelihood and costs of financial distress. Investors are insufficiently pessimistic about the business prospects of some IPOs, and apparently purchase shares assuming all new issues will survive.

JEL Classification: G12, G30

Suggested Citation

Lewis, Craig M. and Seward, James K. and Foster-Johnson, Lynn, Busted Ipos and Windows of Misopportunity (April 2000). Available at SSRN: https://ssrn.com/abstract=233206 or http://dx.doi.org/10.2139/ssrn.233206

Craig M. Lewis (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

James K. Seward

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-2738 (Phone)
608-265-4195 (Fax)

Lynn Foster-Johnson

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-1945 (Phone)

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