Re-Jin Guo
University of Illinois at Chicago
Baruch Lev
New York University
Charles Shi
University of California, Irvine
Abstract: We introduce in this study a new element into the IPO signaling literature by hypothesizing that issuers use R&D expenditures as a signal for their technological capabilities, or firm ability. Consistent with our signaling model predictions, we find that the IPO underpricing (first day return) is positively and strongly associated with the issuerÂ’s R&D intensity, controlling for known underpricing determinants, such as size of issue and underwriter reputation. Furthermore, the three-year performance of R&D-intensive IPOs is significantly better than that of IPOs with no, or low R&D, in terms of both earnings and stock returns, and the proceeds from post-IPO stock issues is positively related to pre-IPO R&D-intensity. We thus establish R&D as an important IPO signaling device.
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