Working Paper, Brown University, Department of Economics 2005-06
We find that IPOs issued in more competitive, and more highly leveraged, industries underperform in the three years following their issuance. Both results are economically large, and are robust to numerous controls. We conduct several tests to trace the economic sources of this underperformance. Although explanations are not mutually exclusive, our evidence most strongly supports an explanation based on the information content of IPOs: observing the decision to issue an IPO reveals information about an industry’s future organization, and investors ignore this information when valuing firms. The logic is along the lines of Myers and Majluf (1984), and it suggests that a simple corporate financing decision (issuing an IPO) may contain value-relevant information about an entire industry’s future organization. This embedded information is relevant to both IPO firms and existing firms alike.