Is IPO Underperformance a Peso Problem?
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Yael V. Hochberg
National Bureau of Economic Research (NBER); Rice University - Jesse H. Jones Graduate School of Business
NBER Working Paper No. w12203
Recent studies suggest that the underperformance of IPOs in the post-1970 sample may be a small sample effect or %u201CPeso%u201D problem. That is, IPO underperformance may result from observing too few star performers ex-post than were expected ex-ante. We develop a model of IPO performance that captures this intuition by allowing returns to be drawn from mixtures of outstanding, benchmark, or poor performing states. We estimate the model under the null of no ex-ante average IPO underperformance and construct small sample distributions of various statistics measuring IPO relative performance. We find that small sample biases are extremely unlikely to account for the magnitude of the post-1970 IPO underperformance observed in data.
Number of Pages in PDF File: 49
Date posted: May 25, 2006