Pseudo Market Timing and the Long-Run Underperformance of IPOs

Abstract

Numerous studies document long-run underperformance by firms following equity offerings. This paper shows that underperformance is very likely to be observedex-postin 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 whenex-anteexpected abnormal returns are zero, medianex-postunderperformance for equity issuers will be significantly negative in event-time. Using calendar-time returns solves the problem.