The Small IPO and the Investing Preferences of Mutual Funds
60 Pages Posted: 20 Jan 2016 Last revised: 8 Nov 2019
Date Written: July 28, 2017
We examine how liquidity and return concerns at large mutual funds explain their diminished participation in small IPOs since the late 1990s. Using 5,825 IPOs and portfolio-level information for 37,052 funds, we exploit Russia’s 1998 debt default as an exogenous shock to funds’ liquidity concerns. After 1998, large funds invested in fewer small/illiquid IPOs and more large/liquid IPOs than smaller funds and received higher returns for small IPO investments. Given increased fund sizes since 1990, these results are consistent with fund’s liquidity concerns and their demand for greater compensation when investing in transactions representing a trivial fraction of fund assets.
Keywords: Initial Public Offerings, liquidity, flight-to-liquidity, mutual funds, institutional investors
JEL Classification: G01, G11, G12, G20, G24, G38
Suggested Citation: Suggested Citation