I thank the editor, Arnold R. Cowan, and an anonymous reviewer for helpful comments and suggestions. The author also thanks Joe Ogden, Michael Rozeff, Philip Perry, Frank Jen, Kee Chung, and seminar participants at the University of Manitoba for helpful comments, and Jay Ritter for making underwriter ranking data available on his web site.
Market Underreaction to Free Cash Flows from IPOs
Version of Record online: 11 JAN 2007
Volume 42, Issue 1, pages 75–97, February 2007
How to Cite
Zheng, S. X. (2007), Market Underreaction to Free Cash Flows from IPOs. Financial Review, 42: 75–97. doi: 10.1111/j.1540-6288.2007.00162.x
- Issue online: 11 JAN 2007
- Version of Record online: 11 JAN 2007
- initial public offering;
- long-run performance;
- free cash flow;
- agency cost;
- capital expenditure;
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.