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DIVERGENCE OF OPINION AND LONG-TERM PERFORMANCE OF INITIAL PUBLIC OFFERINGS

Authors


  • We would like to thank Ravi Jagannathan, Robert Korajczyk, Kent Daniel, Thomas Lys, Robert McDonald, Todd Pulvino, Ronnie Sadka, Anna Scherbina, and seminar participants at the 2003 Financial Management Association annual meeting for their insightful comments. We greatly appreciate many helpful comments and suggestions by William T. Moore (the former editor) and Allan Eberhart (the referee). We gratefully acknowledge the contribution of Thomson Financial for providing earnings per share forecast data, available through the Institutional Brokers Estimate System. All remaining errors are ours.

Abstract

Miller's hypothesis posits that divergence of opinion can lead to asset overvaluation and subsequent long-term underperformance in markets (such as initial public offerings [IPOs]) with restricted short-selling. Consistent with this hypothesis, we find that early-market return volatility, a proxy for divergence of opinion, is negatively related to subsequent IPO long-term abnormal returns. This relation holds after accounting for other factors that previous studies suggest affect long-term abnormal returns for IPOs (including another proxy for divergence of opinion). Moreover, we find that this relation is stronger in IPO markets than in non-IPO markets (where short-selling restrictions are less stringent), again consistent with Miller's hypothesis.

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