Do IPOs Underperform in the Long-Run? New Evidence from the Canadian Stock Market

We measure the long-run performance of 141 Canadian IPOs between 1986 and 2000, using continuously rebalanced and purged control portfolios (size and book-to-market ratios). Results remain relatively similar irrespective of whether we use an event-time approach (buy-and-hold abnormal returns and cumulative abnormal returns) or a calendar-time approach (mean calendar-time abnormal returns and alphas from the Fama-French three-factor pricing model). However, results do differ significantly whether we use equally-weighted (EW) or value-weighted (VW) portfolios. More specifically, we find significant overperformance when EW portfolios are formed, while no significant outperformance is found when VW portfolios are constructed. As we attempt to explain the long-run performance of Canadian IPOs, we find that financial and underpriced IPOs as well as those in growth sectors outperform in the long-run, and that analysts' long-term growth forecasts are informative of the a firm's future performance
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