Institutional Versus Individual Investment in Ipos: The Importance of Firm Fundamentals
Laura Casares Field
Pennsylvania State University - Smeal College of Business
November 4, 2005
AFA 2006 Boston Meetings Paper
Over both short and long horizons, IPOs with greater institutional shareholdings outperform those with smaller institutional shareholdings. Over a one-quarter horizon, institutions can identify firms that beat market benchmarks. Over the long-run, however, institutions' advantage lies entirely in their ability to avoid firms that exhibit the worst performance. Institutions appear to rely heavily on readily available firm and offer characteristics when making their investment decisions. In contrast, individual investors are less likely to consider such characteristics and, as a result, they invest disproportionately in poorly performing firms. However, a simple strategy of investing in higher quality firms, for example, firms with positive earnings prior to the IPO, would enable individuals to avoid much of this underperformance.
Number of Pages in PDF File: 47
Keywords: Initial public offerings, institutional investors, individual investors, long-run performance
JEL Classification: G24, G14
Date posted: November 4, 2004
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