Market Underreaction to Free Cash Flows from IPOs

Steven X. Zheng

The Financial Review, 2007, vol. 42, issue 1, 75-97

Abstract: I examine the relation between initial public offering (IPO) long‐run stock performance and the amount of cash raised by the firm in the offering. I find that IPOs raising more cash have poorer long‐run performance. The result is robust to different measurement methods. The evidence suggests that the market underreacts to free cash flow related agency problems in IPOs. Consistent with this interpretation, I find that IPO long‐run performance is more sensitive to the new cash raised in the offering if an IPO firm has lower capital expenditure or higher opening bid‐ask spread.

Date: 2007
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