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SSRN Electronic Journal

Article . 2004 . Peer-reviewed

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The Economic Profitability of IPO Underperformance*

descriptionPublicationkeyboard_double_arrow_right Article , Other literature type 01 Jan 2004Publisher:Elsevier BVJournal:SSRN Electronic Journal (eissn: 1556-5068,

Authors: William W. Stammerjohan; Yan Xiong;

doi: 10.2139/ssrn.591686

The Economic Profitability of IPO Underperformance*

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Abstract

This paper tests the economic profitability of a zero-investment trading strategy based on knowledge of IPO underperformance and on estimates of pre-IPO earnings management. This trading strategy is implemented by forming two-firm portfolios that take short positions in the IPOs and long positions in control firms matched by industry and market capitalization. The first test shows that significant positive abnormal returns can be earned trading on knowledge of IPO underperformance. However, the second test fails to show a link between the level of abnormal returns earned on this trading strategy and the level of pre-IPO earnings management.

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