Pseudo Market Timing Research Articles

Pseudo Market Timing and the Long-Run Performance of IPOs

Numerous studies document long-run underperformance by firms following initial public offerings or seasoned offerings. In this paper I show that such underperformance is very likely to be observed ex-post in an efficient market. The premise is that more firms issue equity at higher stock prices even though they cannot predict future returns. Ex-post, issuers will seem to time the market because there will usually be more offerings at market peaks than when stock prices are low. Simulations based on observed market parameters suggest that even when ex-ante expected abnormal returns are zero, median ex-post underperformance for equity issuers will be significantly negative and very close to what is actually observed.