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Long run underperformance of initial public offerings: an explanation

Edward Miller
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Edward Miller: University of New Orleans

No 1999-18, Working Papers from University of New Orleans, Department of Economics and Finance

Abstract: Initial public offerings, even though risky, typically underperform the indices for the first few years after offering. This can be explained by high divergence of opinion raising the initial market price, and by this divergence of opinion declining over time. With time, the valuation of the price setting marginal investor comes closer to the average investor’s valuation. This theory also explains why the firms with the greatest underperformance are those with a short operating history, low sales, low prestige underwriters, low institutional ownership, high volatility, high underpricing at the time of issuance, listing on regional exchanges, and those in certain industries.

Keywords: Initial public offering (IPO); Investors; Market valuation (search for similar items in EconPapers)
JEL-codes: G12 G14 G24 (search for similar items in EconPapers)
Date: 2000-02-06
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