IPO Firms, Operating Activities, and IPO Underperformance

• In Event: Forecasting and Disclosure

Abstract

This paper examines the operating activities of IPO firms versus seasoned firms to investigate three widespread explanations for IPO underperformance. We find that, compared to seasoned firms, IPO firms (1) make excess purchases, some of which are unrelated to expected growth, (2) generate higher sales growth for a given level of purchases, and (3) collect less cash for a given level of earnings. Our findings are consistent with both the agency costs and timing hypotheses of IPO underperformance; our findings are not consistent with the accounting earnings manipulation hypothesis. Our overall results suggest that managerial decisions on purchases and revenue recognition likely play a major role in IPO underperformance.

Authors

• Michelle Liu, New York Institute of Technology

• Clayton Forester, University of Minnesota, Morris