Merging Activity as a Rational Explanation for the Long-Run Underperformance of IPO

Patrick Sentis

Multinational Finance Journal, 2009, vol. 13, issue 1-2, 75-102

Abstract: The phenomena of IPO underpricing and underperformance are examined in the same rational model. In this model, underpricing is caused by the presence of uninformed investors. Low-type firms carry out an IPO under the same conditions as high-type firms. Instead of investing by themselves, the latter prefer to merge with a bidder, which entails their delisting from the market. The behavior of these firms provides a rational explanation for the underperformance phenomenon since only low-type firms remain on the market. Initial preliminary findings are consistent with the basic idea of the model. We show that when mergers occur, the monthly average return of the remaining firms is significantly negative, whereas the monthly average return is not significantly different from zero for the months without mergers. This result suggests that mergers induce a depreciation effect on the remaining firms and could be a source of underperformance.

Keywords: initial public offerings; underpricing; underperformance; delisted; takeover; merger (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.mfsociety.org/modules/modDashboard/uplo ... bmvv18dm14k6mbs4.pdf
http://www.mfsociety.org/modules/modDashboard/uplo ... ogleScholar/790.html

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mfj:journl:v:13:y:2009:i:1-2:p:75-102

Access Statistics for this article

Multinational Finance Journal is currently edited by Panayiotis C. Andreou

More articles in Multinational Finance Journal from Multinational Finance Journal Contact information at EDIRC.
Bibliographic data for series maintained by Theodossiou Panayiotis ().