The Long-Term Performance of IPOs, Revisited

52 Pages Posted: 10 Mar 2017 Last revised: 5 Jun 2018

See all articles by Daniel Hoechle

Daniel Hoechle

FHNW School of Business - Institute for Finance; University of Basel - Department of Finance

Larissa 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: April 27, 2018

Abstract

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

Hoechle, Daniel and Karthaus, Larissa and Schmid, Markus, The Long-Term Performance of IPOs, Revisited (April 27, 2018). Available at SSRN: https://ssrn.com/abstract=2929733 or http://dx.doi.org/10.2139/ssrn.2929733

Daniel Hoechle

FHNW School of Business - Institute for Finance ( email )

Peter Merian-Strasse 86
Basel, CH-4002
Switzerland
+41 61 279 17 73 (Phone)

University of Basel - Department of Finance ( email )

Peter Merian-Weg 6
Basel, CH-4002
Switzerland

Larissa 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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