Explaining the Short- and Long-Term IPO Anomalies in the US by R&D


  • Re-Jin Guo,

  • Baruch Lev,

  • Charles Shi

    Corresponding authorSearch for more papers by this author
    • *

      The authors are, respectively, at the University of Illinois at Chicago, New York University, and the University of California at Irvine. They thank Alexander Ljungqvist, Jum McKeown, Roni Michaely, Peter Pope, Andrew Stark, Ashley Wang, an anonymous referee, and participants at the 2003 American Accounting Association Meeting and the 2005 JBFA Conference for helpful comments.

†Charles Shi, Paul Merage School of Business, University of California, Irvine, CA, USA.
e-mail: cshi@uci.edu


Abstract:  Financial scholars who research the initial underpricing and long-term underperformance of IPOs generally attribute these phenomena to information asymmetry and investors’ misevaluations. Here, we identify, on a sample of 2,696 US IPOs issued during 1980–1995, a widespread source of information asymmetry and valuation uncertainty—the R&D activities of issuers—and document that these activities significantly affect both the initial underpricing of IPOs (R&D is positively correlated with underpricing) and their long-term performance (R&D is positively related to long-term performance). Given the pervasiveness and constant growth of firms’ R&D activities in modern economies, our identification of R&D as a major factor affecting IPO's performance contributes to the understanding of this important economic and capital market phenomenon.