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Keywords:

  • IPO;
  • initial public offering;
  • long-run performance;
  • free cash flow;
  • agency cost;
  • overpricing;
  • capital expenditure;
  • underreaction
  • G14

Abstract

I examine the relation between initial public offering (IPO) long-run stock performance and the amount of cash raised by the firm in the offering. I find that IPOs raising more cash have poorer long-run performance. The result is robust to different measurement methods. The evidence suggests that the market underreacts to free cash flow related agency problems in IPOs. Consistent with this interpretation, I find that IPO long-run performance is more sensitive to the new cash raised in the offering if an IPO firm has lower capital expenditure or higher opening bid-ask spread.