IPO Underpricing, Firm Quality, and Analyst Forecasts

Abstract

We find that IPO underpricing is positively related to post-IPO growth in sales and EBITDA, but is not significantly related to growth in earnings. Our evidence suggests that accrual reversals or earnings management may cause this inconsistency. We interpret the growth rates of sales and EBITDA as measures of firm quality, and conclude that our evidence supports the notion that IPO firms with greater underpricing are of better quality. Our tests on analysts' earnings forecast errors show that analysts are less positively biased in their earnings forecasts for IPO firms that have greater underpricing. Copyright (c) 2007 Financial Management Association International.

IPO underpricing, signaling, and property returns

“…To avoid this dilemma, high-quality companies use underpricing as a signaling mechanism to convince shareholders to invest in the IPO. Although appealing, empirical evidence for the signaling argument is mixed (see Michaely and Shaw 1994;Zheng and Stangeland 2007).…”

Network Positions and the Probability of Being Acquired: An Empirical Analysis in the Biopharmaceutical Industry

“…Also, IPO firms are highly visible within the industry. An IPO is also a signal of the quality of the firm's products (Stoughton, Wong and Zechner, 2001) and its potential sales and earnings before interest, taxes, depreciation and amortization (Zheng and Stangeland, 2007). Thus, we can argue that going through an IPO is such a strong visibility and quality signal that it completely subsumes the visibility and quality-signaling role of the firm's network positioning.…”

The effects of venture capital syndicate diversity on earnings management and performance of IPOs in the US and UK: An institutional perspective

“…1 This appears to be fairly effective in raising the valuation of the IPO, which is likely to trade at overvalued prices (DuCharme et al, 2001), and it is also likely to increase IPO underpricing (Zheng and Stangeland, 2007). However, as accounting accruals eventually reverse, poor-quality firms suffer from lower performance in the longer-term (Teoh et al, 1998b).…”