Merging Activity as Rational Explanation of Long-Run Underperformance of Ipos

Download or read book Merging Activity as Rational Explanation of Long-Run Underperformance of Ipos written by Patrick Sentis and published by . This book was released on 2005 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the phenomena of IPO underpricing and underperformance in the same rational model. In this model, underpricing is caused by the presence of uninformed investors. Low-type firms carry out an IPO at same condition as high-type firms. Instead of investing by own, these latter prefer to merge with a bidder which entails their delisting from the market. The behavior of these firms provides a rational explanation for the underperformance phenomenon since only low-type firms remain on the market. First preliminary findings are consistent with the basic idea of the model. We show that when mergers occur the monthly average return of remaining firms is significantly negative whereas the monthly average return is not significantly different from zero for months without mergers. This result suggests that mergers induce a depreciating effect on the remaining firms and could be a source of underperformance.