IPO Stock Performance and the Financial Crisis

Abstract: This paper takes the first opportunity to study the impact of the recent financial crisis on the stock price performance of initial public offerings (IPOs) in the short and long run. We conduct an analysis of 588 firms newly listed on the U.S. stock markets over the period 2003-2010. We find little evidence of the crisis having affected the average level of underpricing. Measuring 3-year buy-and-hold abnormal returns by benchmarking IPOs against portfolios of matched control firms, our results show the crisis to have had a strong positive impact on long-term performance. While firms that go public during non-crisis years are shown on average to underperform by 22%, crisis IPOs significantly outperform the benchmark by 26%. This effectively results in an average difference of 48% in abnormal returns between the two periods after 3 years. We conclude from our analysis that the market is prone to severe overreactions, caused by investor optimism/pessimism and herding behaviour. Our findings thus provide evidence against the Efficient Market Hypothesis in its semi-strong form.