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The Long-Term Performance of IPO’s, Revisited

Daniel Hoechle (), Larissa Karthaus and Markus Schmid

No 1706, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: The literature on IPO long-term performance generally focuses on three- to five-year post-issue time horizons. Research published in the 2000s shows that the apparent underperformance of IPOs docu-mented in the 1990s disappears when the different risk exposures between IPO and mature firms are accounted for by using a Carhart (1997) factor model. In this paper, we show that a sample of 7,487 U.S. IPOs between 1975 and 2014 continues to significantly underperform mature firms in terms of Carhart-alphas over two years, with underperformance peaking one year after going public. We apply a regression-based portfolio sorts approach (RPS), which allows to decompose the Carhart-alpha into firm-specific characteristics, to explain one-year IPO underperformance using a multitude of market and firm characteristics in a statistically robust setting. In fact, our RPS-model that augments the Carhart factors by a set of firm characteristics related to investments, internationality, liquidity, and leverage can explain IPO underperformance. We find similar results when using the Fama-French three-factor model or an augmented version of the Carhart model. We challenge our RPS-model by applying it to the most severely underperforming sub-samples in terms of firm size, time period, venture capital involvement, and IPO underpricing, and find it to explain IPO underperformance across all sub-samples.

Keywords: IPO Underperformance; Long-Term Performance Evaluation; Time Horizon; Firm Characteristics (search for similar items in EconPapers)
JEL-codes: G14 G24 G32 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2017-03
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-ent, nep-fmk and nep-his
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