Conditional Price Trends in the Aftermarket for Initial Public Offerings

We document that the risk-adjusted returns on initial public offerings (IPOs) in the short-term aftermarket are in the same direction as their initial mispricing. The initially underpriced issues earn 2.46% (6.40%) more, on average, than similar sized firms over the first month (first three months) of trading. In contrast, overpriced IPOs underperform size-matched firms, on average, by 4.42% (1.31%) over a similar period. Subsequently, both groups of IPOs earn similar negative abnormal returns, which is consistent with the long-term underperformance of IPOs reported in previous studies. Further scrutiny indicates that the observed condition price trends cannot be satisfactorily explained by underwriter price stabilization.