IPO Underpricing, Firm Quality, and Analyst Forecasts

Steven Xiaofan Zheng · David A. Stangeland

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Financial Markets and Investment Strategies Corporate Finance and Governance Auditing, Earnings Management, Governance

Abstract

We find that IPO underpricing is positively related to post‐IPO growth in sales and EBITDA, but is not significantly related to growth in earnings. Our evidence suggests that accrual reversals or earnings management may cause this inconsistency. We interpret the growth rates of sales and EBITDA as measures of firm quality, and conclude that our evidence supports the notion that IPO firms with greater underpricing are of better quality. Our tests on analysts' earnings forecast errors show that analysts are less positively biased in their earnings forecasts for IPO firms that have greater underpricing.

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References

1997Industry costs of equity 1977INFORMATIONAL ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL INTERMEDIATION 1977Informational Asymmetries, Financial Structure, and Financial Intermediation 1986Why new issues are underpriced 1986Investment banking, reputation, and the underpricing of initial public offerings 1998Earnings Management and the Long‐Run Market Performance of Initial Public Offerings 2002Errors in Estimating Accruals: Implications for Empirical Research 2004Why Has IPO Underpricing Changed Over Time

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