Information Risk and Long Run Performance of Initial Public Offerings

Exactly forty years after Eugene Fama’s (1965) article “The Behavior of Stock Market Prices” (Journal of Business), the play ”E?cient Capital Markets” is still going strong. This work is building on the concept of information quality, information uncertainty or information risk. There has been an extensive debate in financial economics research on long-term abnormal stock returns following firms’ initial public offerings (IPOs). So far, the discussion has concentrated on long-term underperformance. Frank Ecker examines the performance of U.S. IPOs from 1980 to 2002. He links positive and negative abnormal returns to the deviation of the realized information risk from the expected information risk. The author shows that abnormal returns are significantly negative during the price adjustment process when information risk has initially been underestimated whereas the returns are significantly positive in cases of information risk overestimation. Based on his findings, he proposes effective measures for a long-term profitable investment strategy in IPOs.