47 Pages Posted: 4 Nov 2004
Date Written: November 4, 2005
Over both short and long horizons, IPOs with greater institutional shareholdings outperform those with smaller institutional shareholdings. Over a one-quarter horizon, institutions can identify firms that beat market benchmarks. Over the long-run, however, institutions' advantage lies entirely in their ability to avoid firms that exhibit the worst performance. Institutions appear to rely heavily on readily available firm and offer characteristics when making their investment decisions. In contrast, individual investors are less likely to consider such characteristics and, as a result, they invest disproportionately in poorly performing firms. However, a simple strategy of investing in higher quality firms, for example, firms with positive earnings prior to the IPO, would enable individuals to avoid much of this underperformance.
Keywords: Initial public offerings, institutional investors, individual investors, long-run performance
JEL Classification: G24, G14
Suggested Citation: Suggested Citation
Field, Laura Casares and Lowry, Michelle, Institutional Versus Individual Investment in Ipos: The Importance of Firm Fundamentals (November 4, 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=613563 or http://dx.doi.org/10.2139/ssrn.613563
By Ping He