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RFS Advance Access originally published online on March 26, 2004
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Rev Fin 2004; 17:811-848
The Review of Financial Studies Vol. 17, No. 3 © 2004 The Society for Financial Studies; all rights reserved.

Are IPOs Really Underpriced?

Amiyatosh K. Purnanandam
Cornell University

Bhaskaran Swaminathan
Cornell University

Address correspondence to Bhaskaran Swaminathan, 317 Sage Hall, Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853, or e-mail: bs30{at}cornell.edu.

While IPOs have been underpriced by more than 10% during the past two decades, we find that in a sample of more than 2,000 IPOs from 1980 to 1997, the median IPO was significantly overvalued at the offer price relative to valuations based on industry peer price multiples. This overvaluation ranges from 14% to 50% depending on the peer matching criteria. Cross-sectional regressions show that "overvalued" IPOs provide high first-day returns, but low long-run risk-adjusted returns. These overvalued IPOs have lower profitability, higher accruals, and higher analyst growth forecasts than "undervalued" IPOs. Ex post, the projected high growth of overvalued IPOs fails to materialize, while their profitability declines from pre-IPO levels. These results suggest IPO investors are deceived by optimistic growth forecasts and pay insufficient attention to profitability in valuing IPOs.


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