DIVERGENCE OF OPINION AND LONG‐TERM PERFORMANCE OF INITIAL PUBLIC OFFERINGS

Yan Gao, Connie X. Mao and Rui Zhong

Journal of Financial Research, 2006, vol. 29, issue 1, 113-129

Abstract: Miller's hypothesis posits that divergence of opinion can lead to asset overvaluation and subsequent long‐term underperformance in markets (such as initial public offerings [IPOs]) with restricted short‐selling. Consistent with this hypothesis, we find that early‐market return volatility, a proxy for divergence of opinion, is negatively related to subsequent IPO long‐term abnormal returns. This relation holds after accounting for other factors that previous studies suggest affect long‐term abnormal returns for IPOs (including another proxy for divergence of opinion). Moreover, we find that this relation is stronger in IPO markets than in non‐IPO markets (where short‐selling restrictions are less stringent), again consistent with Miller's hypothesis.

Date: 2006
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