The authors would like to thank Francesca Cornelli for helpful comments
HIGH-TECH IPOS: A TALE OF TWO CONTINENTS
Article first published online: 11 APR 2005
Journal of Applied Corporate Finance
Volume 15, Issue 1, pages 87–94, Spring 2002
How to Cite
Aaij, S. and Brounen, D. (2002), HIGH-TECH IPOS: A TALE OF TWO CONTINENTS. Journal of Applied Corporate Finance, 15: 87–94. doi: 10.1111/j.1745-6622.2002.tb00343.x
- Issue published online: 11 APR 2005
- Article first published online: 11 APR 2005
The typical price behavior of an initial public offering (IPO), consisting of a price upsurge on the first trading day followed by subpar performance in the (longer-run) after-market, is one of the most intriguing puzzles in corporate finance. This study focuses on high-tech IPOs in Europe and the U.S. over the period 1998–2001, both to compare the European and U.S. IPO markets and to determine how the price behavior of high-tech IPOs compares to that of IPOs in general. Average initial-day returns were 39% and 64% for the European and U.S. samples, respectively. The median returns were significantly lower, however, indicating that the sample averages are affected by a small group of exceptionally strong performers. But, for the first full year of trading, the median market-adjusted returns were negative for both samples. Not surprisingly, this substandard aftermarket performance was most apparent in companies that failed to generate operating profits.
As with IPOs in general, high-tech IPOs showed higher initial-day returns in “hot” markets than in “cold.” Strong first-day performance was a good predictor of IPO volume in the high-tech market, with strong first-day returns triggering a flood of IPOs in subsequent months. Overall, then, the authors' study concludes that the price behavior of high-tech IPOs provides an exaggerated version of the general tendency of IPOs to be underpriced initially but underperform over the longer term.