Dissecting IPO returns

Zoran Filipovic and Biljana Seistrajkova
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Zoran Filipovic: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper examines the first-day returns and subsequent (under)performance of initialpublic offerings (IPOs). We provide an alternative explanation of the IPO underpricingpuzzle and show that the first-day market price is not a good proxy for the intrinsic valueof the company. We find that IPOs are overpriced both by the underwriters in the primarymarket and the investors in the secondary market relative to their peers. To test our hypotheses we focus on the behavior of sophisticated participants in the secondary market:short sellers and analysts. The main driver of the first-day return is the overreaction of lessinformed investors to hot IPOs in the secondary market, while pressure from sophisticatedinvestors to find lendable securities is pushing the price of the newly issued stock even to ahigher level. Short interest on the first trading day is negatively linked to subsequent longrun stock returns and accounting performance of the IPOs. Our findings are consistent withthe behavioural theories that assume presence of irrational (sentiment) investors.

Keywords: Initial public offerings; IPO performance; Short Selling; Analysts Recommendations (search for similar items in EconPapers)
Date: 2023-06
Note: View the original document on HAL open archive server: https://hal.science/hal-04579888v1
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Published in FMA (Financial Management Association International) 2023 European Conference, Jun 2023, Aalborg, Denmark. pp.37

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