Does idiosyncratic risk matter in IPO long-run performance?

Marie-Claude Beaulieu () and Habiba Mrissa Bouden ()
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Marie-Claude Beaulieu: Université Laval
Habiba Mrissa Bouden: Université de Sousse

Review of Quantitative Finance and Accounting, 2020, vol. 55, issue 3, No 5, 935-981

Abstract: Abstract This paper studies how firm-level idiosyncratic risk varies over time and affects both initial public offering (IPO) and matched non-IPO firms’ long-run performance. It revisits the traditional approach to compute the long-run performance by conditioning aftermarket performance on idiosyncratic risk with a generalized autoregressive conditional heteroskedasticity GARCH-M extension of the standard three-factor Fama and French (3FF) model. Our findings show a positive long-run relationship between idiosyncratic risk and expected returns for almost all IPOs and matched non-IPO firms. We find that, in general, IPOs do not underperform their peers when we adjust long-run abnormal returns for firm-level idiosyncratic risk. We also note that the idiosyncratic risk exposure depends on the IPO profile; it is more important for firms going public in hot-issue markets, undervalued IPOs and high idiosyncratic-risk issues. Thus, this paper suggests that a part of abnormal returns in specific IPOs long-run performance is derived from firm idiosyncratic risk.

Keywords: Initial public offerings; Performance measures; Asset pricing; Idiosyncratic risk (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11156-019-00864-x

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