Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies
Alon Brav and
Paul Gompers ()
Journal of Finance, 1997, vol. 52, issue 5, 1791-1821
The authors investigate the long-run underperformance of recent initial public offering (IPO) firms in a sample of 934 venture-backed IPOs from 1972 to 1992 and 3,407 nonventure-backed IPOs from 1975 to 1992. They 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 that have not issued equity perform as poorly as IPOs. Copyright 1997 by American Finance Association.
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