Accepted by Jeffrey Callen. The paper greatly benefitted from comments by Jeffrey Callen and two anonymous referees. Furthermore, I thank Liesbeth Bruynseels, Qi Chen, Jennifer Francis, Holger Haaf, Hellmuth Milde, Per Olsson, Katherine Schipper, Hartmut Wächter and seminar participants at Duke University, the Swedish Institute for Financial Research (SIFR), the Tilburg University Spring Camp, and the University of Trier for their helpful suggestions.
Information Precision and Long-Run Performance of Initial Public Offerings†
Version of Record online: 13 FEB 2014
Contemporary Accounting Research
Volume 31, Issue 3, pages 876–910, Fall 2014
How to Cite
Ecker, F. (2014), Information Precision and Long-Run Performance of Initial Public Offerings. Contemporary Accounting Research, 31: 876–910. doi: 10.1111/1911-3846.12043
- Issue online: 11 SEP 2014
- Version of Record online: 13 FEB 2014
- Accepted manuscript online: 3 MAY 2013 09:02PM EST
Due to a lack of an information history, IPO firms' information precision is not only generally low but also likely to be estimated initially with considerable error. I hypothesize and find that the deviation between expected and realized information precision is predictably associated with the magnitude and the persistence of long-run abnormal returns after an IPO. Specifically, an upward (downward) revision of information precision results in positive (negative) abnormal returns over the period in which investors update their beliefs. In addition, the positive abnormal returns of firms with unexpectedly high realized information precision are less persistent than the negative abnormal returns of firms with unexpectedly low realized information precision, which can extend up to 18 months after the IPO. The findings imply that long-term investors in IPO stocks do not necessarily behave irrationally, but that both positive and negative post-IPO abnormal performance is also consistent with rational investors gradually updating the perceived information precision parameter of these stocks.