Divergence of Opinion, Uncertainty, and the Quality of Initial Public Offerings

University of Notre Dame Working Paper

35 Pages Posted: 15 Jun 2001

See all articles by Todd Houge

Todd Houge

University of Iowa

Tim Loughran

University of Notre Dame

Xuemin Sterling Yan

University of Missouri - Columbia

Gerry Suchanek

University of Iowa - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 7, 2001

Abstract

Using a sample of 2,025 initial public offerings (IPOs) from 1993-1996, we examine the relation between the divergence of opinion among investors and the long-run performance of IPOs. We focus on three opening-day proxies for the uncertainty about an IPO: opening bid-ask spread, the time of first trade, and the flipping ratio. After controlling for issue quality, we find all three variables provide significant predictive ability to explain long-run IPO returns. Specifically, a large opening spread, a late opening trade, and a high flipping ratio are associated with poor long-run returns. Our findings are consistent with Miller (1977), who demonstrates that divergence of opinion leads to both short-run overvaluation and long-run underperformance of IPOs.

Keywords: Initial public offerings, IPOs, Divergence of opinion, Uncertainty, Long-run returns, Flipping, Opening spread, Time of First Trade

JEL Classification: G12, G14, G24, G30, D80

Suggested Citation

Houge, Todd and Loughran, Tim and Yan, Xuemin Sterling and Suchanek, Gerry, Divergence of Opinion, Uncertainty, and the Quality of Initial Public Offerings (June 7, 2001). University of Notre Dame Working Paper, Available at SSRN: https://ssrn.com/abstract=273531 or http://dx.doi.org/10.2139/ssrn.273531

Todd Houge (Contact Author)

University of Iowa ( email )

Henry B. Tippie College of Business
Department of Finance, S288 PBB
Iowa City, IA 52242-1994
United States
319-335-3754 (Phone)
319-335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/thouge

Tim Loughran

University of Notre Dame ( email )

Department of Finance
245 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-8432 (Phone)
574-631-5255 (Fax)

Xuemin Sterling Yan

University of Missouri - Columbia ( email )

Robert J. Trulaske Sr. College of Business
427 Cornell Hall
Columbia, MO 65211-2600
United States
573-884-9708 (Phone)
573-884-6296 (Fax)

HOME PAGE: http://business.missouri.edu/yanx/

Gerry Suchanek

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

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