Explaining the Short‐ and Long‐Term IPO Anomalies in the US by R&D

Re‐Jin Guo, Baruch Lev and Charles Shi

Journal of Business Finance & Accounting, 2006, vol. 33, issue 3‐4, 550-579

Abstract: Abstract: 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 long‐term performance (R&D is positively related to long‐term 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.

Date: 2006
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