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Pseudo Market Timing and the Long‐Run Underperformance of IPOs
Author(s) -
Schultz Paul
Publication year - 2003
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/1540-6261.00535
Subject(s) - initial public offering , issuer , equity (law) , ex ante , market timing , economics , monetary economics , business , stock (firearms) , financial economics , stock market , event study , finance , horse , mechanical engineering , paleontology , context (archaeology) , biology , political science , law , macroeconomics , engineering
Numerous studies document long‐run underperformance by firms following equity offerings. This paper shows that underperformance is very likely to be observed ex‐post in an efficient market. The premise is that more firms issue equity at higher stock prices even though they cannot predict future returns. Ex‐post , issuers seem to time the market because offerings cluster at market peaks. Simulations based on 1973 through 1997 data reveal that when ex‐ante expected abnormal returns are zero, median ex‐post underperformance for equity issuers will be significantly negative in event‐time. Using calendar‐time returns solves the problem.