The persistence of IPO mispricing and the predictive power of flipping

This paper examines underwriters' pricing errors and the information conten t of first-day trading activity in IPOs. We show that first-day winners con tinue to be winners over the first year, and first-day dogs continue to he relative dogs. Exceptions are "extra-hot" IPOs, which provide the worst fut ure performance. We also demonstrate that large, supposedly informed, trade rs "flip" IPOs that perform the worst in the future. IPOs with low flipping generate abnormal returns of 1.5 percentage points per month over the firs t six months beginning on the third day. We show that flipping is predictab le and conclude that underwriters' pricing errors are intentional.