A seminar by Associate Professor Feng Zhang from Southern Methodist University
Title: Non-Random Survival and Long-Run IPO Underperformance*
Abstract: Following initial public offering (IPO), firms appear to underperform matched seasoned firms, which is often attributed to market inefficiency. This study, however, shows that such underperformance can be observed ex-post in an efficient market. Many IPO firms are delisted shortly after their IPO and their delisting is not random: those with worse performance are delisted early. Non-random survival has two effects. First, seasoned firms have greater expected returns than IPO firms. Second, IPO firms’ observed returns on average understate their ex-ante expected returns. Thus, even if IPO firms’ ex-ante expected abnormal returns are zero, they underperform matched seasoned firms ex-post.
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