Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies
Journal of Finance, Vol. 52 No. 4, December 1997
Posted: 11 Apr 1998
We investigate the long-run underperformance of recent initial public offering (IPO) firms in a sample of 934 venture-backed IPOs from 1972-1992 and 3,407 nonventure-backed IPOs from 1975-1992. We find that venture-backed IPOs outperform nonventure-backed IPOs using equal- weighted returns. Value weighting significantly reduces performance differences and substantially reduces underperformance for nonventure-backed IPOs. In tests using several comparable benchmarks and the Fama-French (1993) three factor asset pricing model, venture-backed companies do not significantly underperform, while the smallest nonventure-backed firms do. Underperformance, however, is not an IPO effect. Similar size and book-to-market firms which have not issued equity perform as poorly as IPOs.
JEL Classification: G12, G14
Suggested Citation: Suggested Citation