Liquidity Risk, Leverage and Long-Run IPO Returns

Bjorn Eckbo () and Oyvind Norli ()

No 4832, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 G20 G24 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (62)

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Journal Article: Liquidity risk, leverage and long-run IPO returns (2005)
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