Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies

Posted: 17 Nov 2009

See all articles by Alon Brav

Alon Brav

Duke University - Fuqua School of Business

Paul A. Gompers

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: 1997

Abstract

This study addresses the three main issues related to the underperformance of initial public offerings (IPOs), reported in prior studies. Examines whether venture capitalists affect the long-run performance of newly public firms, investigates the effects of using different benchmarks and different methods of measuring performance to gauge the robustness of IPO underperformance, and provides initial evidence on the sources of underperformance. Data--including date of the offering, size of the issue, issue price, number of secondary shares, and the underwriter--were gathered from 934 venture-backed IPOs, for 1972-1992, and 3,407 nonventure-backed IPOs, for 1975-1992. Results show that returns on venture-backed IPOs are significantly greater than returns on nonventure-backed IPOs. In addition, returns on nonventure-backed IPOs are below relevant benchmarks when returns are weighted equally. Differences in performance between the groups and the level of underperformance are reduced once returns are value weighted. It is also shown that underperformance is not unique to firms issuing equity--eliminating IPOs and seasoned equity offerings from size and book-to-market portfolios demonstrates that IPOs perform no worse than similar non-issuing firms. Reexamining the result from prior research on underperformance finds that most comes from small, nonventure-backed IPOs. The performance is similar to that of small, low book-to-market non-issuing firms. Reasons for this category of underperformance need further experimentation. (SFL)

Keywords: Performance measures, Initial public offerings (IPO), Public firms, Firm performance, Benchmarks, Venture capitalists, Venture capital firms

Suggested Citation

Brav, Alon and Gompers, Paul A., Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies (1997). The Journal of Finance, Vol. 52, Issue 5, p. 1791-18 1997. Available at SSRN: https://ssrn.com/abstract=1505205

Alon Brav (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-2908 (Phone)
919-684-2818 (Fax)

Paul A. Gompers

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6297 (Phone)
617-496-8443 (Fax)

Harvard University - Entrepreneurial Management Unit ( email )

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,153
PlumX Metrics