The Long-Run Performance Of Firms Conducting IPOs Or SEOs And The New Issue Effect

This paper investigates the long-run underperformance as well as the post-issue operating performance of firms conducting Initial Public Offerings or Seasoned Equity Offerings. A significant decline in both buy-and-hold return and operating performance subsequent to the IPOs or SEOs is found. Factors analysis such as the equity retention factor, the offering price factor, the financing scale factor, the initial return factor, the sales growth measure factor, the asset turnover factor, the capital expenditure factor, the MV/BV ratio factor and the new issue effect factor are documented. Using the methodology of cross-session regression and time-series regression, a positive relation between post-issue operating performance and the equity retention factor, a negative relation between post-issue operating performance and the offering price factor, the initial return factor, the sales growth measure factor, the MV/BV ratio factor and the asset turnover factor is found, but there is no relation between post-issue operating performance and the level of initial underpricing. Similarly, there is a negative relation between the buy-and-hold return and the offering price factor and the initial return factor. Additionally, a "new issue effect" factor is proved to be existing. The patterns are consistent with an IPO or SEO market in which (1) firms take advantage of the "windows of opportunity" when investors are overoptimistic about the earnings potential of IPO firms or SEO firms, and (2) the reduction in management ownership that occurs when a firm conducting new issues is likely to lead to the agency problem, and (3) firms time their issues to coincide with periods of unusually good performance levels, which they know cannot be sustained in the future.