Skip to main content
SpringerLink
Log in

The Nature and Persistence of Initial Public Offering Aftermarket Returns Predictability

  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

This paper examines the predictability of monthly aftermarket returns of initial public offerings during the first six years of trading. Predictability is tested under the null hypothesis of random walk using a Markov chain analysis. The evidence shows that excess returns of IPOs (adjusted for the return on the equally weighted NASDAQ index) demonstrate non-random walk behavior through the first five years of trading and random walk behavior in the sixth year. This is accompanied by predictability of monthly excess returns conditioned on the two previous months' excess returns. A trading strategy is offered to capitalize on the predictability patterns. Implementing the trading strategy is not possible due to institutional barriers, providing additional explanation for why IPOs do not reach their intrinsic values for extended periods of time.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Aggarwal, Reena, Ricardo Leal, and Leonardo Hernandez, “The Aftermarket Performance of Initial Public Offerings in Latin America.” Financial Management 22(1), 42–53, 1993.

    Google Scholar 

  • Aggarwal, Reena, and Pietra Rivoli, “Fads in the Initial Public Offering Market.” Financial Management 19(4), 45–57, 1990.

    Google Scholar 

  • Bessembinder, Hendrik, and Michael Hertzel, “Return Autocorrelation around Nontrading Days.” Review of Financial Studies 6(1), 155–189, 1993.

    Google Scholar 

  • Byrd, John, Douglas Hensler, and Scott Lee, “The Long-Run Performance of IPOs, Underwriter Reputation, and the Timing of IPO Offerings.” Working Paper University of Texas at Arlington, 1993.

  • Fama, Eugene, “Efficient Capital Markets: A Review of theory and Empirical Work.” Journal of Finance 25, 383–416, 1970.

    Google Scholar 

  • Fama, Eugene, “Efficient Capital Markets: II.” Journal of Finance 46, 1575–1617, 1991.

    Google Scholar 

  • Fama, Eugene, and Kenneth French, “Permanent and Temporary Components of Stock Prices.” Journal of Political Economy 96, 246–273, 1988.

    Google Scholar 

  • Kim, M., Charles Nelson, and Richard Startz, “Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence.” Review of Economic Studies 58,No. 3, 515–528.

  • Levis, Mario, “The Long-Run Performance of Initial Public Offerings: The UK Experience.” Financial Management 22(1), 28–41, 1993.

    Google Scholar 

  • Lo, Andrew, and Craig MacKinley, “Stock market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test.” The Review of Financial Studies 1(1), 41–66, 1988.

    Google Scholar 

  • Loughran, Tim, “NYSE vs. NASDAQ Returns, Market Microstructure or the Poor Performance of Initial Public Offerings?” Journal of Financial Economics 33,No. 2, 241–260, 1993.

    Google Scholar 

  • Loughran, Tim and Jay Ritter, “The New Issues Puzzle.” Journal of Finance 50(1), 23–51, 1995.

    Google Scholar 

  • McQueen, Grant, “Long-Horizon Mean-Reverting Stock Prices Revisited.” Journal of Financial and Quantitative Analysis 27(1), 1–18, 1992.

    Google Scholar 

  • McQueen, Grant and Steven Thorley, “Are Stock Returns Predictable? A Test Using Markov Chains.” Journal of Finance 46(1), 239–263, 1991.

    Google Scholar 

  • Patel, Jayendu, Richard Zeckhauser, and Darryll Hendricks, “The Rationality Struggle: Illustrations from Financial Markets.” American Economic Review 81, 232–236, 1991.

    Google Scholar 

  • Poterba, James and Lawrence Summers, “Mean Reversion in Stock Prices: Evidence and Implications.” Journal of Financial Economics 22(1), 27–59, 1988.

    Google Scholar 

  • Ritter, Jay R., “The “Hot Issue” Market of 1980.” Journal of Business 57, 215–240, (April 1984).

  • Ritter, Jay R., “The Long-Run Performance of Initial Public Offerings.” Journal of Finance 46(1), 3–48, 1991.

    Google Scholar 

  • West, Kenneth, “Bubbles, Fads, and Stock Price Volatility Tests: A Partial Evaluation.” Journal of Finance 43(3), 639–656, 1988.

    Google Scholar 

  • Zeckhauser, Richard, Jayendu Patel, and Darryll Hendricks, “Nonrational Actors in Financial Markets Behavior.” Theory and Decision 31, 257–287, (September 1991).

Download references

Author information

Authors and Affiliations

  1. Engineering Management Program, College of Engineering and Applied Science, University of Colorado at Boulder, Campus Box 435, Boulder, CO, 80309-0435

    Douglas Hensler

Authors
  1. Douglas Hensler
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Hensler, D. The Nature and Persistence of Initial Public Offering Aftermarket Returns Predictability. Review of Quantitative Finance and Accounting 10, 39–58 (1998). https://doi.org/10.1023/A:1008296013545

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/A:1008296013545

Search

Navigation