DIVERGENCE OF OPINION AND LONG-TERM PERFORMANCE OF INITIAL PUBLIC OFFERINGS

Miller's hypothesis posits that divergence of opinion can lead to asset overvaluation and subsequent long-term underperformance in markets (such as initial public offerings [IPOs]) with restricted short-selling. Consistent with this hypothesis, we find that early-market return volatility, a proxy for divergence of opinion, is negatively related to subsequent IPO long-term abnormal returns. This relation holds after accounting for other factors that previous studies suggest affect long-term abnormal returns for IPOs (including another proxy for divergence of opinion). Moreover, we find that this relation is stronger in IPO markets than in non-IPO markets (where short-selling restrictions are less stringent), again consistent with Miller's hypothesis. 2006 The Southern Finance Association and the Southwestern Finance Association.