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The Long-Term Performance of IPOs, Revisited

43 Pages Posted: 10 Mar 2017 Last revised: 6 Jun 2017

Daniel Hoechle

University of Basel - Department of Finance

Larissa M. Karthaus

University of St. Gallen - Swiss Institute of Banking and Finance

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance

Date Written: March 8, 2017

Abstract

Prior research on IPO long-term performance focuses on three- to five-year post-issue periods and shows that the apparent IPO underperformance disappears when different risk exposures across IPO and mature firms are accounted for by using a Carhart (1997) factor model. We show that a sample of 7,487 U.S. IPOs between 1975 and 2014 continues to significantly underperform mature firms in terms of Carhart-alphas over two years, with underperformance peaking one year after going public. We apply a regression-based portfolio sorts approach (RPS) to explain one-year IPO underperformance using a multitude of market and firm characteristics in a statistically robust setting. Our RPS-model, that augments the Carhart-factors by firm characteristics related to investments, internationality, liquidity, and leverage, completely explains IPO underperformance. Our RPS-model even explains underperformance in the univariately most severely underperforming sub-samples in terms of firm size, time period, venture capital involvement, and IPO underpricing.

Keywords: IPO Underperformance, Long-Term Performance Evaluation, Time Horizon, Firm Characteristics

JEL Classification: G14, G24, G32

Suggested Citation

Hoechle, Daniel and Karthaus, Larissa M. and Schmid, Markus, The Long-Term Performance of IPOs, Revisited (March 8, 2017). Available at SSRN: https://ssrn.com/abstract=2929733

Daniel Hoechle

University of Basel - Department of Finance ( email )

Holbeinstrasse 12
Basel, CH-4051
Switzerland
+41 61 267 32 43 (Phone)

Larissa M. Karthaus (Contact Author)

University of St. Gallen - Swiss Institute of Banking and Finance

Unterer Graben 21
St. Gallen, CH-9000
Switzerland

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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