Skip to main content
    • Aa
    • Aa

The Desire to Acquire and IPO Long-Run Underperformance

  • James C. Brau (a1), Robert B. Couch (a2) and Ninon K. Sutton (a3)

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.

Linked references
Hide All

This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

A. Agrawal ; J. F. Jaffe ; and G. N. Mandelker . “The Post-Merger Performance of Acquiring Firms: A Re-Examination of an Anomaly.” Journal of Finance, 47 (1992), 16051621.

M. Baker ; R. S. Ruback ; and R. Wurgler . “Behavioral Corporate Finance.” In The Handbook of Corporate Finance: Empirical Corporate Finance, B. E. Eckbo , ed. New York: Elsevier/North Holland (2007).

D. J. Bradley ; J. W. Cooney Jr.; S. D. Dolvin ; and B. D. Jordan . “Penny Stock IPOs.” Financial Management, 35 (2006), 530.

D. J. Bradley , and B. D. Jordan . “Partial Adjustment to Public Information and IPO Underpricing.” Journal of Financial and Quantitative Analysis, 37 (2002), 595616.

J. C. Brau , and S. E. Fawcett . “Initial Public Offerings: An Analysis of Theory and Practice.” Journal of Finance, 61 (2006), 399436.

J. C. Brau ; B. Francis ; and N. Kohers (Sutton). “The Choice of IPO versus Takeover: Empirical Evidence.” Journal of Business, 76 (2003), 583612.

A. Brav , and P. A. Gompers . “Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies.” Journal of Finance, 52 (1997), 17911821.

C. Camerer , and D. Lovallo . “Optimism and Excess Entry: An Experimental Approach.” American Economic Review, 89 (1999), 306318.

R. B. Carter ; F. H. Dark ; and A. K. Singh . “Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks.” Journal of Finance, 53 (1998), 285311.

U. Celikyurt ; M. Sevilir ; and A. Shivdasani . “Going Public to Acquire: The Acquisition Motive for IPOs.” Journal of Financial Economics, 96 (2010), 345363.

K. Chan ; J. W. Cooney Jr.; J. Kim ; and A. K. Singh . “The IPO Derby: Are There Consistent Winners and Losers on This Track?Financial Management, 37 (2008), 4579.

A. C. Cooper ; C. Y. Woo ; and W. C. Dunkelberg . “Entrepreneurs’ Perceived Chances for Success.” Journal of Business Venturing, 3 (1988), 97108.

M. J. Cooper ; H. Gulen ; and M. J. Schill . “Asset Growth and the Cross-Section of Stock Returns.” Journal of Finance, 63 (2008), 16091651.

E. F. Fama , and K. R. French . “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 356.

J. Franks ; R. Harris ; and S. Titman . “The Postmerger Share-Price Performance of Acquiring Firms.” Journal of Financial Economics, 29 (1991), 8196.

A. Hovakimian , and I. Hutton . “Merger-Motivated IPOs.” Financial Management, 39 (2010), 15471573.

K. M. Kahle , and R. A. Walkling . “The Impact of Industry Classifications on Financial Research.” Journal of Financial and Quantitative Analysis, 31 (1996), 309335.

N. Kohers , and T. Kohers . “Takeovers of Technology Firms: Expectations vs. Reality.” Financial Management, 30 (2001), 3554.

A. Landier , and D. Thesmar . “Financial Contracting with Optimistic Entrepreneurs.” Review of Financial Studies, 22 (2009), 117150.

C. Loderer , and K. Martin . “Postacquisition Performance of Acquiring Firms.” Financial Management, 21 (1992), 6979.

T. Loughran , and J. R. Ritter . “The New Issues Puzzle.” Journal of Finance, 50 (1995), 2351.

T. Loughran , and J. R. Ritter . “Uniformly Least Powerful Tests of Market Efficiency.” Journal of Financial Economics, 55 (2000), 361389.

T. Loughran , and A. M. Vijh . “Do Long-Term Shareholders Benefit from Corporate Acquisitions?Journal of Finance, 52 (1997), 17651790.

E. Lyandres ; L. Sun ; and L. Zhang . “The New Issues Puzzle: Testing the Investment-Based Explanation.” Review of Financial Studies, 21 (2008), 28252855.

J. D. Lyon ; B. M. Barber ; and C.-L. Tsai . “Improved Methods for Tests of Long-Run Abnormal Stock Returns.” Journal of Finance, 54 (1999), 165201.

U. Malmendier , and G. Tate . “Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction.” Journal of Financial Economics, 89 (2008), 2043.

M. Massa ; Z. Rehman ; and T. Vermaelen . “Mimicking Repurchases.” Journal of Financial Economics, 84 (2007), 624666.

A. Purnanandam , and B. Swaminathan . “Are IPOs Really Underpriced?Review of Financial Studies, 17 (2004), 811848.

J. R Ritter . “The Long-Run Performance of Initial Public Offerings.” Journal of Finance, 46 (1991), 327.

J. R. Ritter , and I. Welch . “A Review of IPO Activity, Pricing, and Allocations.” Journal of Finance, 57 (2002), 17951828.

R. Roll The Hubris Hypothesis of Corporate Takeovers.” Journal of Business, 59 (1986), 197216.

Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Full text views

Total number of HTML views: 0
Total number of PDF views: 198 *
Loading metrics...

Abstract views

Total abstract views: 611 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 20th September 2017. This data will be updated every 24 hours.