Liquidity Risk, Leverage and Long-Run IPO Returns

47 Pages Posted: 22 Apr 2005

See all articles by B. Espen Eckbo

B. Espen Eckbo

Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Oyvind Norli

BI Norwegian Business School - Department of Financial Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 2005


We examine the risk-return characteristics of a rolling portfolio investment strategy where more than six thousand Nasdaq initial public offering (IPO) stocks are bought and held for up to five years. The average long-run portfolio return is low, but IPO stocks appear as 'longshots', as five-year buy-and-hold returns of 1000% or more are somewhat more frequent than for non-issuing Nasdaq firms matched on size and book-to-market ratio. The typical IPO firm is of average Nasdaq market capitalization but has relatively low book-to-market ratio. We also show that IPO firms exhibit relatively high stock turnover and low leverage, which may lower systematic risk exposures. To examine this possibility, we launch an easily constructed 'low minus high' (LMH) stock turnover portfolio as a liquidity risk factor. The LMH factor produces significant betas for broad-based stock portfolios, as well as for our IPO portfolio and a comparison portfolio of seasoned equity offerings. The factor-model estimation also includes standard characteristics-based risk factors, and we explore mimicking portfolios for leverage-related macroeconomic risks. Because they track macroeconomic aggregates, these mimicking portfolios are relatively immune to market sentiment effects. Overall, we cannot reject the hypothesis that the realized return on the IPO portfolio is commensurable with the portfolio's risk exposures, as defined here.

Keywords: Asset pricing, liquidity, risk and return, Initial Public Offering (IPO), capital structure, market efficiency

JEL Classification: G10, G11, G12, G20, G24

Suggested Citation

Eckbo, B. Espen and Norli, Oyvind, Liquidity Risk, Leverage and Long-Run IPO Returns (January 2005). CEPR Discussion Paper No. 4832. Available at SSRN:

B. Espen Eckbo (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)


European Corporate Governance Institute (ECGI)

B-1050 Brussels

Oyvind Norli

BI Norwegian Business School - Department of Financial Economics ( email )

Nydalsveien 37
Oslo, N-0442
+4746410514 (Phone)

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