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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.

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Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
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