| Consistent with the results in Ritter (1991), this dissertation finds that IPO firms as a whole underperformed a market index and control firms over a three-year period after going public. However, the IPO firms that had positive earnings at the time of offering seem to have fared better than the firms that went public with losses. Although the long-run median returns indicate that all IPOs underperformed the NASDAQ index and a set of control firms matched by industry and size, only the firms going public with negative earnings have statistically and economically significant negative abnormal mean returns. Also, parametric and nonparametric tests generally indicate that firms with positive profits had better performance than firms with losses. When we match the IPO firms based on earnings per share at the time of offering, however, no significant difference between the returns of the two IPO groups is found. A simplified simulation experiment indicates that industry and size matching method appears to have more predictive power than earnings per share matching method. Also, the IPO firms with negative earnings seem to be younger at the time of offering and concentrated in risky and high growth industries. The general findings in this dissertation suggest that investors may have been too optimistic about future prospects of the IPO firms, especially those that had negative earnings, although a mere 'bad luck' scenario cannot be ruled out. Although IPO firms with profits have substantially higher P/E ratios than more established matching firms at the time of offering, the magnitude of stock underperformance of the former compared to the latter is small. Therefore, the higher P/E multiples of the IPO firms seem to have reflected their higher growth prospects and do not appear to be an evidence for a systematic over-optimistic valuation. |
