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Is Ipo Underperformance a Peso Problem?

Published online by Cambridge University Press:  06 April 2009

Andrew Ang,
Li Gu and
Yael V. Hochberg
Andrew Ang
Affiliation:
aa610@columbia.edu, Columbia Business School, 3022 Broadway, 805 Uris, New York, NY 10027
Li Gu
Affiliation:
lgu@fordham.edu, Graduate School of Business 403A, Fordham University, 113 West 60th St., New York, NY 10023
Yael V. Hochberg
Affiliation:
y-hochberg@kellogg.northwestern.edu, Kellogg School of Management, Northwestern University, 2001 Sheridan Rd., Evanston, IL 60208.
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Abstract

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Recent studies suggest that the underperformance of IPOs in the post-1970 sample may be a small sample effect or “Peso problem.” That is, IPO underperformance may result from observing too few star performers ex post than were expected ex ante. We develop a model of IPO performance that captures this intuition by allowing returns to be drawn from mixtures of outstanding, benchmark, or poor performing states. We estimate the model under the null of no ex ante average IPO underperformance and construct small sample distributions of various statistics measuring IPO relative performance. We find that small sample biases are extremely unlikely to account for the magnitude of the post-1970 IPO underperformance observed in data.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 3 , September 2007, pp. 565 - 594
Copyright
Copyright © School of Business Administration, University of Washington 2007

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