Hostname: page-component-8448b6f56d-cfpbc Total loading time: 0 Render date: 2024-04-18T07:09:53.463Z Has data issue: false hasContentIssue false
  • English
  • Français

The Desire to Acquire and IPO Long-Run Underperformance

Published online by Cambridge University Press:  20 April 2012

James C. Brau ,
Robert B. Couch  and
Ninon K. Sutton
James C. Brau
Affiliation:
Marriott School, Brigham Young University, TNRB 640, Provo, UT 84602jbrau@byu.edu
Robert B. Couch
Affiliation:
Atkinson Graduate School of Management, Willamette University, 309 Mudd Bldg, Salem, OR 97301rcouch@willamette.edu
Ninon K. Sutton
Affiliation:
University of South Florida (USF), 4202 E Fowler Ave, BSN 3403, Tampa, FL 33620. nsutton@usf.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

We analyze 3,547 initial public offerings (IPOs) from 1985 through 2003 to determine the impact of acquisition activity on long-run stock performance. The results show that IPOs that acquire within a year of going public significantly underperform for 1- through 5-year holding periods following the 1st year, whereas nonacquiring IPOs do not significantly underperform over these time frames. For example, the mean 3-year style-adjusted abnormal return is – 15.6% for acquirers and 5.9% for nonacquirers. Our cross-sectional and calendar-time results suggest that the acquisition activity of newly public firms plays an important and previously unrecognized role in the long-run underperformance of IPOs.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 3 , June 2012 , pp. 493 - 510
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Agrawal, A.; Jaffe, J. F.; and Mandelker, G. N.. “The Post-Merger Performance of Acquiring Firms: A Re-Examination of an Anomaly.” Journal of Finance, 47 (1992), 1605–1621.Google Scholar
Baker, M.; Ruback, R. S.; and Wurgler, R.. “Behavioral Corporate Finance.” In The Handbook of Corporate Finance: Empirical Corporate Finance, Eckbo, B. E., ed. New York: Elsevier/North Holland (2007).Google Scholar
Bradley, D. J.; Cooney, J. W. Jr.; Dolvin, S. D.; and Jordan, B. D.. “Penny Stock IPOs.” Financial Management, 35 (2006), 5–30.CrossRefGoogle Scholar
Bradley, D. J., and Jordan, B. D.. “Partial Adjustment to Public Information and IPO Underpricing.” Journal of Financial and Quantitative Analysis, 37 (2002), 595–616.CrossRefGoogle Scholar
Brau, J. C., and Fawcett, S. E.. “Initial Public Offerings: An Analysis of Theory and Practice.” Journal of Finance, 61 (2006), 399–436.CrossRefGoogle Scholar
Brau, J. C.; Francis, B.; and Kohers, N. (Sutton). “The Choice of IPO versus Takeover: Empirical Evidence.” Journal of Business, 76 (2003), 583–612.CrossRefGoogle Scholar
Brav, A., and Gompers, P. A.. “Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies.” Journal of Finance, 52 (1997), 1791–1821.Google Scholar
Bruner, R. F. “Does M&A Pay? A Survey of Evidence for the Decision-Maker.” Journal of Applied Finance, 12 (2002), 48–68.Google Scholar
Camerer, C., and Lovallo, D.. “Optimism and Excess Entry: An Experimental Approach.” American Economic Review, 89 (1999), 306–318.CrossRefGoogle Scholar
Carter, R. B.; Dark, F. H.; and Singh, A. K.. “Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks.” Journal of Finance, 53 (1998), 285–311.CrossRefGoogle Scholar
Celikyurt, U.; Sevilir, M.; and Shivdasani, A.. “Going Public to Acquire: The Acquisition Motive for IPOs.” Journal of Financial Economics, 96 (2010), 345–363.CrossRefGoogle Scholar
Chan, K.; Cooney, J. W. Jr.; Kim, J.; and Singh, A. K.. “The IPO Derby: Are There Consistent Winners and Losers on This Track?” Financial Management, 37 (2008), 45–79.CrossRefGoogle Scholar
Chen, L.; Novy-Marx, R.; and Zhang, L.. “An Alternative Three-Factor Model.” Available at SSRN: http://ssrn.com/abstract=1418117 (2010).CrossRefGoogle Scholar
Cooper, A. C.; Woo, C. Y.; and Dunkelberg, W. C.. “Entrepreneurs’ Perceived Chances for Success.” Journal of Business Venturing, 3 (1988), 97–108.CrossRefGoogle Scholar
Cooper, M. J.; Gulen, H.; and Schill, M. J.. “Asset Growth and the Cross-Section of Stock Returns.” Journal of Finance, 63 (2008), 1609–1651.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Franks, J.; Harris, R.; and Titman, S.. “The Postmerger Share-Price Performance of Acquiring Firms.” Journal of Financial Economics, 29 (1991), 81–96.CrossRefGoogle Scholar
Hovakimian, A., and Hutton, I.. “Merger-Motivated IPOs.” Financial Management, 39 (2010), 1547–1573.CrossRefGoogle Scholar
Kahle, K. M., and Walkling, R. A.. “The Impact of Industry Classifications on Financial Research.” Journal of Financial and Quantitative Analysis, 31 (1996), 309–335.CrossRefGoogle Scholar
Kohers, N., and Kohers, T.. “Takeovers of Technology Firms: Expectations vs. Reality.” Financial Management, 30 (2001), 35–54.CrossRefGoogle Scholar
Landier, A., and Thesmar, D.. “Financial Contracting with Optimistic Entrepreneurs.” Review of Financial Studies, 22 (2009), 117–150.CrossRefGoogle Scholar
Loderer, C., and Martin, K.. “Postacquisition Performance of Acquiring Firms.” Financial Management, 21 (1992), 69–79.CrossRefGoogle Scholar
Loughran, T., and Ritter, J. R.. “The New Issues Puzzle.” Journal of Finance, 50 (1995), 23–51.CrossRefGoogle Scholar
Loughran, T., and Ritter, J. R.. “Uniformly Least Powerful Tests of Market Efficiency.” Journal of Financial Economics, 55 (2000), 361–389.CrossRefGoogle Scholar
Loughran, T., and Ritter, J.. “Why Has IPO Underpricing Changed Over Time?” Financial Management, 33 (2004), 5–37.Google Scholar
Loughran, T., and Vijh, A. M.. “Do Long-Term Shareholders Benefit from Corporate Acquisitions?” Journal of Finance, 52 (1997), 1765–1790.Google Scholar
Lyandres, E.; Sun, L.; and Zhang, L.. “The New Issues Puzzle: Testing the Investment-Based Explanation.” Review of Financial Studies, 21 (2008), 2825–2855.CrossRefGoogle Scholar
Lyon, J. D.; Barber, B. M.; and Tsai, C.-L.. “Improved Methods for Tests of Long-Run Abnormal Stock Returns.” Journal of Finance, 54 (1999), 165–201.CrossRefGoogle Scholar
Malmendier, U., and Tate, G.. “Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction.” Journal of Financial Economics, 89 (2008), 20–43.CrossRefGoogle Scholar
Massa, M.; Rehman, Z.; and Vermaelen, T.. “Mimicking Repurchases.” Journal of Financial Economics, 84 (2007), 624–666.CrossRefGoogle Scholar
Purnanandam, A., and Swaminathan, B.. “Are IPOs Really Underpriced?” Review of Financial Studies, 17 (2004), 811–848.CrossRefGoogle Scholar
Rau, P. R., and Vermaelen, T.. “Glamour, Value and the Post-Acquisition Performance of Acquiring Firms.” Journal of Financial Economics, 49 (1998), 223–253.Google Scholar
Ritter, J. R. “The Long-Run Performance of Initial Public Offerings.” Journal of Finance, 46 (1991), 3–27.Google Scholar
Ritter, J. R., and Welch, I.. “A Review of IPO Activity, Pricing, and Allocations.” Journal of Finance, 57 (2002), 1795–1828.CrossRefGoogle Scholar
Roll, R. “The Hubris Hypothesis of Corporate Takeovers.” Journal of Business, 59 (1986), 197–216.CrossRefGoogle Scholar
Titman, S.; Wei, K. C. J.; and Xie, F.. “Capital Investment and Stock Returns.” Journal of Financial and Quantitative Analysis, 39 (2004), 677–700.CrossRefGoogle Scholar