A New Approach for Interpreting Long-Run Returns, Applied to
IPO and SEO Stocks

Jan Bo Jakobsen

and

Torben Voetmann

In this paper, we introduce a new approach for interpreting long-run returns; which we then test on IPOs and SEOs in Denmark. We demonstrate that by decomposing the mean and volatility components of the expected cross-sectional buy-and-hold returns, we can improve the interpretation of long-run returns. Using a traditional method, we found that after five years the buy-and-hold returns of IPO and SEO stocks underperformed the market by 27.3 percent and 21.4 percent, respectively. By applying the new approach we found that after five years the same stocks underperformed by 43.7 percent and 38.1 percent. Although underperformance has long been documented in the empirical literature, we found that the underperformance is larger than previously documented.