Non-Random Survival and Long-Run Firm Performance

Abstract

We show that non-random survival of IPO firms can explain their underperformance compared to matched seasoned firms, which was often attributed to market inefficiency. Because of non-random survival, seasoned firms may have greater expected returns than IPO firms and IPO firms’ average observed returns understate their expected returns. Thus, IPO firms underperform matched seasoned firms ex-post although no firm is expected to earn abnormal returns ex-ante. Non-random survival also affects long-run firm performance after seasoned equity offerings and acquisitions, and helps reconcile conflicting results on long-run firm performance based on the matching firm approach and the calendar time portfolio approach.

Keywords: non-random firm survival, long-run firm performance, survivorship effect, reverse survivorship effect, initial public offerings

JEL Classification: G14, G30