Liquidity Risk, Leverage and Long-Run IPO Returns

44 Pages Posted: 17 Apr 2000 Last revised: 30 Apr 2009

See all articles by B. Espen Eckbo

B. Espen Eckbo

Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Oyvind Norli

BI Norwegian Business School - Department of Financial Economics

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We examine the risk-return characteristics of a rolling portfolio investment strategy where more than six thousand Nasdaq initial public offering (IPO) stocks are bought and held for up to five years. The average long-run portfolio return is low, but IPO stocks appear as longshots, as five-year buy-and-hold returns of 1,000 percent or more are somewhat more frequent than for non-issuing Nasdaq firms matched on size and book-to-market ratio. The typical IPO firm is of average Nasdaq market capitalization but has relatively low book-to-market ratio. We also show that IPO firms exhibit relatively high stock turnover and low leverage, which may lower systematic risk exposures. To examine this possibility, we launch an easily constructed low minus high (LMH) stock turnover portfolio as a liquidity risk factor. The LMH factor produces significant betas for broad-based stock portfolios, as well as for our IPO portfolio and a comparison portfolio of seasoned equity offerings. The factor-model estimation also includes standard characteristics-based risk factors, and we explore mimicking portfolios for leveragerelated macroeconomic risks. Because they track macroeconomic aggregates, these mimicking portfolios are relatively immune to market sentiment effects. Overall, we cannot reject the hypothesis that the realized return on the IPO portfolio is commensurable with the portfolio's risk exposures, as defined here.

Keywords: Liquidity, Long-run returns, IPO

JEL Classification: G12, G14, G32

Suggested Citation

Eckbo, B. Espen and Norli, Oyvind, Liquidity Risk, Leverage and Long-Run IPO Returns. Tuck School of Business Working Paper No. 2004-14, Journal of Corporate Finance, Vol. 11, pp. 1-35, 2005, Available at SSRN: or

B. Espen Eckbo (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)


European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Oyvind Norli

BI Norwegian Business School - Department of Financial Economics ( email )

Nydalsveien 37
Oslo, N-0442
+4746410514 (Phone)

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