Long Run Underperformance after Ipos and Optimistic Analysts' Forecasts
23 Pages Posted: 23 Mar 2001
Date Written: March 2001
Our empirical study examines whether analysts' optimistic forecasts explain the long-run abnormal return following IPOs. Analysts are expected to achieve a mean-zero forecast error. According to previous empirical studies, we find that analysts' earnings forecasts for firms going public have an upward bias. While this bias is larger for high-PER stocks over the first year following IPOs, it strongly increases for low-PER and medium-PER during the two-year period. Accordingly, we show that long-run abnormal return is positively correlated to the actual earnings changes and earnings forecasts revisions. Underperformance appears to be the result of stock price adjustment to the arrival of new information about the true earnings perspectives.
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