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Product market advertising, heterogeneous beliefs, and the long-run performance of initial public offerings

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  • Chemmanur, Thomas
  • Yan, An

Abstract

We study the long-run effects of product market advertising on the equity of firms conducting initial public offerings (IPOs). We find that firms going public with a greater extent of advertising prior to their IPOs are valued higher both in the IPO as well as in the immediate aftermarket, are associated with greater upward price revisions from the pre-IPO filing range means, and have smaller long-run post-IPO stock returns. The above results hold even after controlling for the effects of investor attention, as proxied by the pre-IPO media coverage received by firms going public. We show, using a number of additional tests, that the above findings are consistent with the implications of the heterogeneous beliefs theories of Miller (1977), Harrison and Kreps (1978), and Morris (1996), along with an assumption that product market advertising increases the heterogeneity in outside investor beliefs about firms going public.

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  • Chemmanur, Thomas & Yan, An, 2017. "Product market advertising, heterogeneous beliefs, and the long-run performance of initial public offerings," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 1-24.
    • Handle: RePEc:eee:corfin:v:46:y:2017:i:c:p:1-24
    DOI: 10.1016/j.jcorpfin.2017.06.010
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    4. Duong, Huu Nhan & Goyal, Abhinav & Kallinterakis, Vasileios & Veeraraghavan, Madhu, 2022. "Democracy and the pricing of initial public offerings around the world," Journal of Financial Economics, Elsevier, vol. 145(1), pages 322-341.
    5. Chen, Yangyang & Goyal, Abhinav & Veeraraghavan, Madhu & Zolotoy, Leon, 2020. "Terrorist attacks, investor sentiment, and the pricing of initial public offerings," Journal of Corporate Finance, Elsevier, vol. 65(C).
    6. Reyes, Tomas & Batista, Julian A. & Chacon, Alvaro & Martinez, Diego & Kausel, Edgar E., 2023. "Attention-driven reaction to extreme earnings surprises," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 230-248.
    7. Ikeda, Naoshi, 2023. "Optimism, divergence of investors’ opinions, and the long-run underperformance of IPOs," Journal of Financial Markets, Elsevier, vol. 64(C).
    8. Zhang, Tianjiao & Shen, Zhe & Sun, Qian, 2022. "Product market advertising and stock price crash risk," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    9. Que, Jiangjing & Zhang, Xueyong, 2019. "Pre-IPO growth, venture capital, and the long-run performance of IPOs," Economic Modelling, Elsevier, vol. 81(C), pages 205-216.
    10. Chi, Yeguang & He, Jingbin & Ma, Xinru & Wu, Fei, 2023. "Institutional investor inattention bias in auctioned IPOs," Journal of Banking & Finance, Elsevier, vol. 150(C).
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    More about this item

    Keywords

    Advertising; Initial public offerings; Heterogeneous beliefs; Long-run performance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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