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IPO Failure Risk


  • We thank Mike Barclay, Randy Beatty, Christof Beuselinck, Asher Curtis, Rogier Deumes, Carla Hayn, Steve Hillegeist, John Hand, Roy Jones, Andy Leone, Katharina Lewellen, Erwan Morellec, Lewis Tam, Jerry Warner, Charles Wasley, Ayako Yasuda, Michelle Yetman, Jerry Zimmerman, an anonymous referee, and participants at the Utah Winter Accounting Conference, the EFMA meetings in Milano, the AAA Annual Meetings in San Francisco, the ARNN Conference at Erasmus University Rotterdam, the EFA meetings in Zurich, the London Business School Accounting Symposium, the University of Rochester, George Washington University, the University of Toronto, the University of Southern California, INSEAD, the University of California at Berkeley, and the 2006 Journal of Accounting Research conference for helpful comments and discussions on earlier drafts of this paper. All remaining errors are the sole responsibility of the authors.


We explore the factors associated with historical IPO failures by developing an IPO failure prediction model that includes accounting information as well as proxies for the role of information intermediaries and other IPO deal–related characteristics. We document statistically significant differences in failure models applicable to nontech versus high tech IPOs, and these structural differences are largely driven by accounting-based proxies for firms' investments in intangible assets, operating performance, and financial leverage. We also develop parsimonious, predominantly accounting-based, strictly out-of-sample (i.e., no hindsight) IPO failure forecasting models for each of the two sectors. We find that our forecasts are negatively associated with one-year post-IPO abnormal returns. A pseudo-hedge strategy of going short (long) in high (low) failure risk portfolios yields returns of economically significant magnitudes over the one-year horizon, and is robust to alternative returns methodologies. Further results suggest that IPO long-run returns anomalies may persist, but they take different forms for high-tech and nontech IPOs.