Explaining the Short and Long-Term IPO Anomalies in the Us by R&D
30 Pages Posted: 25 May 2006
Financial scholars who research the initial underpricing and long-term underperformance of IPOs generally attribute these phenomena to information asymmetry and investors' misevaluations. Here, we identify, on a sample of 2,696 US IPOs issued during 1980-1995, a widespread source of information asymmetry and valuation uncertainty - the R&D activities of issuers - and document that these activities significantly affect both the initial underpricing of IPOs (R&D is positively correlated with underpricing) and their longterm performance (R&D is positively related to longterm performance). Given the pervasiveness and constant growth of firms' R&D activities in modern economies, our identification of R&D as a major factor affecting IPO's performance contributes to the understanding of this important economic and capital market phenomenon.
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