Date of Award

Spring 1-1-2011

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Finance

First Advisor

Chris Yung

Second Advisor

Bjorn Jorgensen

Third Advisor

Mattias Kahl

Abstract

In the first essay, we examine the effect of pre-IPO growth rates on the valuation and long-run performance of new issues. IPOs with rapid pre-IPO revenue growth obtain significantly higher offer value and secondary market valuation but have relatively poor long-term stock returns. There is no evidence that performance differentials are due to risk premia. Indeed the high-growth firms are riskier according to traditional measures. Finally, we show that analysts’ forecasts are upwardly biased for all firms, and the magnitude of these biases is greatest for firms with rapid pre-IPO growth. Overall these results are consistent with the behavioral model suggested by Lakonishok, Shleifer and Vishny (1994) and La Porta (1996).

In the second essay, we examine pre-IPO R&D investment as a signal for IPO issuer quality. We find that firms with high levels of pre-IPO R&D investment obtain significantly higher valuations at the IPO and experience superior post-issue operating performance. Pre-IPO R&D investment is positively related to the probability and size of subsequent seasoned offerings. Consistent with the usage of R&D as a signal – in particular, the overuse of it at the time of the IPO – there is a rapid reversal in the amount of post-IPO R&D. In general, these effects are pronounced for high-tech issuers.

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