The Diversification Effects of Initial Public Offerings

35 Pages Posted: 2 Feb 2010

See all articles by Hsuan‐Chi Chen

Hsuan‐Chi Chen

University of New Mexico - Anderson School of Management

Keng-Yu Ho

National Taiwan University - Department of Finance

Yu-Jen Hsiao

National Central University

Cheng-Huan Wu

Yuan-Ze University - Department of Finance

Date Written: 2009-10

Abstract

A firm's stock becomes publicly tradable through an initial public offering (IPO). This study suggests a portfolio diversification perspective to explore IPOs. We examine whether investors can gain diversification benefits by adding an IPO portfolio to a set of benchmark portfolios sorted by firm size and book-to-market ratio. Using US IPOs from 1980-2002, we find that adding a value-weighted IPO portfolio does lead to a statistically and economically significant enlargement of the investment opportunity set for investors relative to investing solely in a set of benchmark portfolios. Specifically, the Sharpe ratio of the tangency portfolio increases by 5.50% on average after including IPO stocks. Furthermore, IPOs associated with prestigious lead underwriters are the main source of this augmentation of the mean-variance investment opportunity set. Finally, our study implies that issuing IPO exchange traded funds or similar products can provide diversification gains to investors.

Suggested Citation

Chen, Hsuan-Chi and Ho, Keng-Yu and Hsiao, Yu-Jen and Wu, Cheng-Huan, The Diversification Effects of Initial Public Offerings (2009-10). Journal of Business Finance & Accounting, Vol. 37, Issue 1-2, pp. 171-205, January/March 2010, Available at SSRN: https://ssrn.com/abstract=1546163 or http://dx.doi.org/10.1111/j.1468-5957.2009.02177.x

Hsuan-Chi Chen

University of New Mexico - Anderson School of Management ( email )

1924 Las Lomas NE
Albuquerque, NM 87131
United States

HOME PAGE: http://www.mgt.unm.edu/faculty/directoryArea.asp#FIN

Keng-Yu Ho

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Yu-Jen Hsiao

National Central University ( email )

No. 300, Zhongda Road
Chung-Li Taiwan, 32054
Taiwan

Cheng-Huan Wu

Yuan-Ze University - Department of Finance ( email )

135 Far-East Rd., Chung-Li 320
Taipei
Taiwan

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1
Abstract Views
1,042
PlumX Metrics