IPO Allocations and New Mutual Funds

Abstract

Using an event time approach, we find that mutual funds outperform during the 6- month period after inception. This result is not driven by incubation bias; rather new fund outperformance concentrates among funds with access to initial public offerings (IPOs), especially to more underpriced IPOs. Favoritism among fund families, partly explains access to IPOs. Finally, funds with access to IPOs that signal preferential access to future IPOs display greater investment flow, even after controlling for performance. Overall, the evidence suggests that fund families strategically exploit access to IPO allocations to open new mutual funds that demonstrate strong investment performance and attract greater investment flow.

Keywords: Mutual Fund, Fund Performance, Initial Public Offering, IPO Allocation

JEL Classification: G11