Outside Insiders: Does Access to Information Prior to an IPO Generate a Trading Advantage After the IPO?

Abstract

We investigate whether access to information prior to an IPO generates a trading advantage after the IPO. We find that limited partners (LPs) of venture capital funds obtain high returns when they invest in newly listed stocks backed by their funds. These returns are not explained by LPs’ differing stock picking abilities, and are higher when LPs’ information advantage over the public is higher. Further, LPs’ access to information eliminates the familiarity bias that they display otherwise. Overall, access to information prior to the IPO results in a trading advantage. These findings contribute to the debate on insider trading regulations.

Keywords: Limited partners, information, investment returns, familiarity bias, venture backed IPOs, insider trading.

JEL Classification: G11, G14, G23, G24