The long-term performance of IPOs, revisited

Abstract

We show that a sample of 7,487 U.S. firms going public between 1975 and 2014 significantly underperforms mature firms in the first year after the IPO. Contrary to post-issue horizons of three to five years, the first-year underperformance cannot be explained by Carhart (1997) risk factor exposures. Moreover, this underperformance is robust to the analysis of sub-samples and the consideration of multiple firm characteristics in a statistically robust setting. Further econometric tests reveal that the first-year underperformance is likely due to unobservable heterogeneity across IPO and mature firms. In fact, the first-year underperformance disappears when we control for such unobservable heterogeneity by including firm fixed effects in the analysis. The magnitude of the firm fixed effects is negatively related to IPO firms’ life expectancy. Consistently, there is no significant IPO underperformance, when differences in life expectancy across IPO and mature firms are accounted for.