Industry peer firms’ earnings predictability, financial crises and IPO underpricing

• In Event: Financial Accounting and Reporting V

Abstract

Investors and analysts generally analyze industry peer firms’ financial condition in order to gain a better understanding about the initial public offerings (hereafter IPO). However, prior literature focuses on the effects of firms’ own characteristics on IPO underpricing (single-security setting). This paper extends the IPO literature to a multi-security setting by investigating the relation between peer firms’ earnings predictability and IPO underpricing. We find that investors interpret transient (one year and quarterly) peer firms’ earnings predictability as managers’ myopic behavior while interpreting long-run (five years) peer firms’ earnings predictability as a desirable attribute. We also show that the financial crises mitigate the positive effect of peer firms’ earnings predictability effect on IPO underpricing. We find that the passage of the Sarbanes-Oxley Act (SOX) of 2002 mitigates the effect of peer firms’ earnings predictability on IPO underpricing. We also provide evidence that peer firms with similar market caps have a more significant impact on IPO underpricing than peer firms with the highest market caps.

Authors

• Zabihollah Rezaee, University of Memphis

• Ji Yu, University of Memphis

• Lei Gao, The University of Memphis