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Market Underreaction to Free Cash Flows from IPOs

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  • Steven X. Zheng

Abstract

I examine the relation between initial public offering (IPO) long‐run stock performance and the amount of cash raised by the firm in the offering. I find that IPOs raising more cash have poorer long‐run performance. The result is robust to different measurement methods. The evidence suggests that the market underreacts to free cash flow related agency problems in IPOs. Consistent with this interpretation, I find that IPO long‐run performance is more sensitive to the new cash raised in the offering if an IPO firm has lower capital expenditure or higher opening bid‐ask spread.

Suggested Citation

  • Steven X. Zheng, 2007. "Market Underreaction to Free Cash Flows from IPOs," The Financial Review, Eastern Finance Association, vol. 42(1), pages 75-97, February.
    • Handle: RePEc:bla:finrev:v:42:y:2007:i:1:p:75-97
    DOI: 10.1111/j.1540-6288.2007.00162.x
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    Cited by:

    1. Bancel, Franck & Kalimipalli, Madhu & Mittoo, Usha R., 2009. "Cross-listing and the long-term performance of ADRs: Revisiting European evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(5), pages 895-923, December.
    2. Hatem Mansali & Florence Labégorre, 2010. "Les performances économiques et boursières à long terme des sociétés introduites en bourse:le cas du marché français (1990-2003)," Revue Finance Contrôle Stratégie, revues.org, vol. 13(2), pages 67-106., June.

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