Post-IPO Capital Expenditures and Market Feedback

This paper presents an empirical test of the "market feedback hypothesis", a theory suggesting that information aggregated in the IPO process is used for the firm's investment decisions. The authors examine the relationship between abnormal post-IPO capital expenditures and feedback generated in the IPO market for 1,543 IPOs between 1987 and 1995. Feedback is measured by (i) the unexpected price adjustment made at the end of the waiting period and (ii) the unexpected initial return. Consistent with the hypothesis, they find that positive abnormal capital expenditures. A long-term event study finds no significant difference in stock returns between hot and cold IPOs. This suggests that firms should not ignore market feedback because hot (or cold) receptions are due to irrational market sentiment only.