DP4609 Pseudo Market Timing: Fact or Fiction?

Author(s): Magnus Dahlquist, Frank de Jong
Publication Date: September 2004
Keyword(s): abnormal return measures, endogenous events, event studies, initial public offerings, long-run underperformance, pseudo market timing
JEL(s): C33, G14, G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4609

The average firm going public or issuing new equity underperforms the market in the long run. A potential explanation of this long-run underperformance has to do with the endogeneity of the number of new issues. That is, due to the clustering of events after periods of high abnormal returns in issues, ex post measures of average abnormal returns may be negative on average despite zero ex ante abnormal returns. This could lead one to incorrectly infer underperformance. We provide a thorough evaluation of the endogeneity problem in event studies as it relates to long-run underperformance and undertake both theoretical and simulation analyses. We argue that it is unlikely that the endogeneity of the number of new issues explains the long-run underperformance in equity issuances.