The Long-Term Performance of IPOs, Revisited

60 Pages Posted: 10 Mar 2017 Last revised: 12 Feb 2020

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: February 10, 2020

Abstract

We show that a sample of 7,487 U.S. firms going public between 1975 and 2014 significantly underperforms mature firms in the first year after the IPO. Contrary to post-issue horizons of three to five years, the first-year underperformance cannot be explained by Carhart (1997) risk factor exposures. Moreover, this underperformance is robust to the analysis of sub-samples and the consideration of multiple firm characteristics in a statistically robust setting. Further econometric tests reveal that the first-year underperformance is likely due to unobservable heterogeneity across IPO and mature firms. In fact, the first-year underperformance disappears when we control for such unobservable heterogeneity by including firm fixed effects in the analysis. The magnitude of the firm fixed effects is negatively related to IPO firms’ life expectancy. Consistently, there is no significant IPO underperformance, when differences in life expectancy across IPO and mature firms are accounted for.

Keywords: IPO underperformance, long-term performance evaluation, time horizon, firm fixed effects, survivorship analysis, life expectancy

JEL Classification: G14, G24, G32

Suggested Citation

Hoechle, Daniel and Karthaus, Larissa and Schmid, Markus, The Long-Term Performance of IPOs, Revisited (February 10, 2020). 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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