The Roles of Institutional Investors in the Failure of Newly Public Stocks

56 Pages Posted: 12 Mar 2019

See all articles by Hong Qian

Hong Qian

Oakland University - Department of Accounting and Finance

Santhosh Ramalingegowda

University of Georgia - Terry College of Business

Zhaodong Zhong

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: February 19, 2019

Abstract

In this article, we study two negative events that can happen to newly public stocks: (1) the price drops at least 50% from the closing price on the first trading date within one year after the initial public offering (IPO) (initial failure) and (2) the firm is delisted for negative reasons within three years after the IPO (final failure). We find that high investor sentiment at the time of IPO can lead to both initial failure and final failure of IPO firms, whereas monitoring by external professionals plays a more important role in averting final failure than initial failure. Exploring the roles of different types of institutional investors, we find that transient (i.e., short-term trading) institutions sell before initial failure. In contrast, dedicated (i.e., monitoring) institutions focus on long-term performance and may stay with stocks suffering temporary initial failure, but their selling typically signals the imminent final failure of newly public firms.

Keywords: Newly Public Stocks, Institutional Investors, Monitoring, Investor Sentiment

JEL Classification: G24, G32

Suggested Citation

Qian, Hong and Ramalingegowda, Santhosh and Zhong, Zhaodong, The Roles of Institutional Investors in the Failure of Newly Public Stocks (February 19, 2019). Available at SSRN: https://ssrn.com/abstract=3338567 or http://dx.doi.org/10.2139/ssrn.3338567

Hong Qian (Contact Author)

Oakland University - Department of Accounting and Finance ( email )

347 Elliott Hall
275 Varner Dr.
Rochester, MI 48309
United States

Santhosh Ramalingegowda

University of Georgia - Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States
706-542-3612 (Phone)

Zhaodong Zhong

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Department of Finance, Rutgers Business School
100 Rockafeller Road
Piscataway, NJ 08854
United States

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