Alon Brav
Duke University, Durham, NC 27708
Paul A. Gompers
Harvard University, Cambridge, MA
ABSTRACT
We investigate the long-run underperformance of recent initial public offering (IPO) firms in a sample of 934 venture-backed IPOs from 1972-1992 and 3,407 nonventure-backed IPOs from 1975-1992. We find that venture backed IPOs during the five years subsequent to their offerings when returns are weighted equally. 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. In all tests, however, the smallest nonventure-backed firms significantly underperform. Underperformance, however, is not an IPO effect. Similar size and book-to-market firms which have not issued equity perform poorly as IPOs. Underperformance of these small issuers may stem from periods of investor sentiment that influence individuals who primarily hold the shares of small, low book-to-market companies. Alternatively, unexpected real shocks may have affected these firms during the sample period.