Abstract
This paper tests the economic profitability of a zero-investment trading strategy based on knowledge of IPO underperformance and on estimates of pre-IPO earnings management. This trading strategy is implemented by forming two-firm portfolios that take short positions in the IPOs and long positions in control firms matched by industry and market capitalization. The first test shows that significant positive abnormal returns can be earned trading on knowledge of IPO underperformance. However, the second test fails to show a link between the level of abnormal returns earned on this trading strategy and the level of pre-IPO earnings management