The Economic Profitability of IPO Underperformance*

44 Pages Posted: 16 Sep 2004

See all articles by Yan Xiong

Yan Xiong

California State University, Sacramento

William W. Stammerjohan

Louisiana Tech University - College of Business

Date Written: September 2004

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.

Keywords: Earnings Management, IPO Underperformance, Zero-investment trading strategy

Suggested Citation

Xiong, Yan and Stammerjohan, William W., The Economic Profitability of IPO Underperformance* (September 2004). Available at SSRN: https://ssrn.com/abstract=591686 or http://dx.doi.org/10.2139/ssrn.591686

Yan Xiong (Contact Author)

California State University, Sacramento ( email )

Sacramento, CA 95819-6081
United States

William W. Stammerjohan

Louisiana Tech University - College of Business ( email )

Railload and College Ave.
Ruston, LA 71272
United States