Institutional Versus Individual Investment in Ipos: The Importance of Firm Fundamentals

47 Pages Posted: 4 Nov 2004  

Laura Casares Field

University of Delaware - Alfred Lerner College of Business and Economics

Michelle Lowry

Drexel University

Date Written: November 4, 2005

Abstract

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

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

Laura Casares Field (Contact Author)

University of Delaware - Alfred Lerner College of Business and Economics ( email )

419 Purnell Hall
Newark, DE 19716
United States
302-831-3810 (Phone)

Michelle B. Lowry

Drexel University ( email )

Philadelphia, PA 19104
United States
215-895-6070 (Phone)

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