Pseudo Market Timing and the Long-Run Underperformance of IPOs


  • Paul Schultz

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    • Schultz is from the University of Notre Dame. Comments of Robert Battalio, Utpal Bhattacharya, Long Chen, George Constantinides, Shane Corwin, Eugene Fama, Margaret Forster, Charles Hadlock, Craig Holden, Naveen Khanna, Inmoo Lee, Tim Loughran, David Mayers, Wayne Mikkelson, Ralph Walkling, an anonymous referee, and seminar participants at the University of Chicago, Indiana University, Michigan State University, and the University of Notre Dame are gratefully acknowledged. Special thanks go to Jay Ritter for encouragement and numerous comments. Blunders and so forth are the sole preserve of the author.


Numerous studies document long-run underperformance by firms following equity offerings. This paper shows that underperformance is very likely to be observed ex-post in an efficient market. The premise is that more firms issue equity at higher stock prices even though they cannot predict future returns. Ex-post, issuers seem to time the market because offerings cluster at market peaks. Simulations based on 1973 through 1997 data reveal that when ex-ante expected abnormal returns are zero, median ex-post underperformance for equity issuers will be significantly negative in event-time. Using calendar-time returns solves the problem.