The Long-Term Performance of IPOs, Revisited
52 Pages Posted: 10 Mar 2017 Last revised: 5 Jun 2018
Date Written: April 27, 2018
Prior research on IPO long-term performance, focusing on three- to five-year post-issue periods, 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 the first year after going public when using conventional portfolio sorts. This result prevails across various sub-samples, and also withstands a battery of robustness checks extending the Carhart (1997) factor model with multiple firm characteristics in a statistically robust setting. Further econometric tests, however, reveal that the apparently robust IPO underperformance is likely to be the result of omitted, yet persistent, firm-specific factors rendering IPO firms different from mature firms. Specifically, we find IPO underperformance to disappear when accounting for unobservable heterogeneity across firms.
Keywords: IPO underperformance, long-term performance evaluation, time horizon, firm characteristics, firm fixed effects
JEL Classification: G14, G24, G32
Suggested Citation: Suggested Citation