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RFS Advance Access published online on March 26, 2004
Review of Financial Studies, doi:10.1093/rfs/hhg055
Review of Financial Studies © The Society for Financial Studies 2004; all rights reserved
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The Review of Financial Studies © The Society for Financial Studies 2004; all rights reserved.

Original Articles

Are IPOs Really Underpriced?

Amiyatosh K. Purnanandam 1 and Bhaskaran Swaminathan 1*
1 Cornell University

* To whom correspondence should be addressed. E-mail: bs30{at}cornell.edu.


  Abstract

While IPOs have been underpriced by over 10% during the past two decades, we find that in a sample of over 2,000 IPOs from 1980 to 1997, the median IPO is 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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[Abstract] [Full Text] [PDF]


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