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The long-run performance of Initial

Public Offerings, and their


relationship with IPO characteristics

Institution: University of Amsterdam, Amsterdam Business School


Course: MSc Business Economics, Finance track
Type: Master Thesis
Title: The long-run performance of Initial Public Offerings, and their relationship
with IPO characteristics
Author: Ritesh Bisseswar (5744423)
Date: 07-07-2015
Thesis Supervisor: dhr. dr. J.E. Ligterink
Statement of Originality

This document is written by Student Ritesh Bisseswar who declares to take full responsibility for the
contents of this document.

I declare that the text and the work presented in this document is original and that no sources other
than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the
work, not for the contents.
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Abstract

This study investigates the long-run performance of initial public offerings (IPOs), and the
determinants of long-run returns of IPOs. Using a sample of 1925 IPOs on NASDAQ between 1980
and 2010, this paper investigates whether IPOs show abnormal performance in the long-run
compared to various benchmarks over three years following the offering. Furthermore, this paper
examines the effect of firm maturity (age) at time of the IPO and several other IPO characteristics on
long-run performance.

To measure long-run performance, cumulative abnormal returns (CAR), buy-and-hold abnormal


returns (BHAR) and wealth relatives (WR) are calculated against various market indices. When
measuring long-run performance using CARs, IPOs do not underperform over three years, in fact the
IPOs in the sample show slight overperformance. When measuring long-run performance using
BHARs and WRs, IPOs appear to underperform the benchmarks three years after the offering.
Furthermore, it appears that younger IPOs show larger underperformance after three years, while the
IPOs in more recent years over performed on average. These results suggest that one must be careful
in concluding whether IPOs underperform or over perform in the long-run. It appears that the
findings of long-run abnormal IPO performance is sensitive to the sample, sample period,
benchmarks used, and the measurement techniques used to evaluate long-run performance.

To identify the effects of firm age and IPO characteristics on long-run returns, a multiple regression
model is used with the three year raw IPO returns as the dependant variable. The results of the
regression analysis surprisingly suggest that firm maturity has a negative effect on long-run IPO
returns, indicating that younger companies should perform better in the long-run. However, as the
regression coefficient of firm age is not statistically significant, firm age therefore is not an
appropriate indicator of long-run IPO performance. The regression models furthermore show that
initial returns and venture backing might be better and more significant indicators of long-run
performance.

In conclusion, this study evaluates the previous findings of long-run IPO performance. The initial
evidence shows that IPOs appear to underperform in the long-run, and that younger companies
underperform more on average. Furthermore, IPOs in more recent years did not underperform,
indicating that the findings of underperformance in prior literature are not persistent when including
more recent years in a sample. However, the significance of these results really depends on the
considerations made in the research design; therefore this study fails to convincingly show that IPOs
underperform in the long-run.
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Table of Contents

Table of Contents 4

1 Introduction 5

2 Literature review and hypothesis development 8

2.1 The market for initial public offerings 8

2.2 Underpricing 9

2.2.1 Evidence for underpricing 9

2.2.2 Theories on underpricing 9

2.3 Long-run performance of IPOs 12

2.3.1 Evidence on long-run performance of IPO 12

2.3.2 Measurement issues in long-run performance 14

2.3.3 Factors Affecting long-run performance 15

2.4 Conclusion & Hypotheses development 22

3 Data 25

3.1 Data collection 25

3.2 Summary statistics 25

3.2.1 IPO characteristics sort by year 25

3.2.2 IPO returns sort by year 27

3.2.3 IPO characteristics sort by age 29

3.3 Conclusion 30

4 Analysis of long-run IPO performance 31

4.1 Measures of long-run performance 31

4.2 Results 32

4.2.1 Monthly abnormal returns 32

4.2.2 3-year abnormal returns per age group 34

4.2.3 3-year abnormal returns per year 35

4.3 Conclusion 37

5 Determinants of IPO long-run performance 38

5.1 Regression design 38

5.2 Regression results 39

6 Summary and conclusions 41


Appendix 43

References 51

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1 Introduction

An initial public offering (IPO) is the sale of a firm’s equity shares to investors on a public stock
exchange for the first time. There are several reasons why companies decide to go public. One of the
most important reasons of going public is to acquire capital. In addition to raising funds, IPOs create
a market in which the founders and existing shareholders can sell their shares. A non-financial reason
to go public is to increase publicity (Brau & Fawcett 2006). There are, however some disadvantages
in conducting an IPO. Major disadvantages are the dilution of ownership and control, and high costs
associated with going public (Ritter & Welch 2002).

The market performances of firms conducting an IPO have received much attention in prior
literature. This performance is usually measured over two horizons, the short-run and long-run
performance. The short-run performance is usually measured over a period of a few days to a month
after an IPO, while the long-run performance is investigated looking at periods longer than a year
(Ritter 1991). One phenomenon that is widely documented in the short-run performance of IPOs is
that IPOs are underpriced on average. To analyse short-run market performance, usually the first-day
average returns are used. The first-day return is the difference between the offer price and the first
day closing price. A positive average return of the first trading day is identified as underpricing, and
was first documented by Logue (1973) and Ibbotson (1975).

A pattern that is observed in the long-run analysis of IPOs is that IPOs appear to underperform (Ritter
1991, Loughran & Ritter 1995, Ang, Gu, & Hochberg 2007). However, evidence for this
phenomenon is not as widespread as that of IPO underpricing. Long-run underperformance generally
means that the subsequent share price of IPOs are usually lower than the first day trading prices,
which results in negative abnormal returns in the long run for investors holding IPO stocks. Long-run
IPO performance is still a debatable issue among researchers as shown by the conflicting findings
that have been produced. Some studies show that IPOs underperform marginally or have no abnormal
performance in the long run (Schultz 2003). With these findings, some have shown that
underperformance disappears when different measures of performance or methodology are used
(Gompers & Lerner 2003). Another explanation is the sample period considered (Hoechle & Schmid
2009), as the magnitude and direction of abnormal performance varies over the years.

Additionally to the debate on whether IPOs underperform in the long-run, a growing strand of
literature focuses on the determinants of IPO long-run returns. Some argue that pre IPO factors such
market timing (Yi 2001) or accounting accruals (Cotton 2008) can explain IPO performance.
Other studies focus on offer characteristics at time of the IPO and show that, amongst others,
ownership characteristics (Gao & Jain 2011), underwriter reputation (Carter, Dark, & Singh 1998)
and venture backing (Brav & Gompers 1997), all play a role in long-run returns of IPOs. In addition,
some studies suggest that characteristics in the aftermarket of the IPO, such as analyst following
(Rajan & Servaes 1997), initial returns (Santos 2010), or volatility (Gao, Mao, & Zhong 2006) are
better predictors of long-run IPO performance.

The large body of literature devoted on IPOs and its subsequent performance, indicates that strong
consensus is still missing on the direction and magnitude of long-run IPO performance. Prior
literature also shows that multiple, and sometimes conflicting, factors exists that can influence long
term IPO returns. This study aims to investigate the apparent patterns in IPO research. First, this
paper investigates the long-run performance of IPOs against various benchmarks. Specific focus will
be on the role of firm age or firm maturity in long-run abnormal performance of IPOs. Furthermore,
this paper also investigates several the effects on several IPO characteristics, based on previous
literature, on long-run IPO returns.

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To identify long-run IPO performance and its determinants, a sample of 1925 IPOs on NASDAQ
between 1980 and 2010 have been investigated. To determine whether IPOs show abnormal
performance in the long-run, cumulative abnormal returns (CAR), buy-and-hold returns (BHAR) and
wealth relatives (WR) are calculated, using the event-time approach, for the sample of IPOs against
different market indices. These indices are the NASDAQ composite, the NYSE composite and the
S&P500. This study further investigates whether the age of a firm when conducting its IPO plays a
role in its long-run performance, therefore, the sample will be split into different age groups. To
investigate how long-run abnormal returns vary over the years, abnormal returns are also calculated
per year. Additionally, the effects of age and offer characteristics on long-run performance will be
evaluated using a multiple regression model. The offer characteristics that are being evaluated are
initial return, offer size, the percentage of secondary shares offered, and whether or not an IPO was
venture backed.

The findings on long-run performance indicate that the results are sensitive to the measurement
technique used. The CARs show that IPOs did not underperform after three years with values ranging
from 2% to 11% across the different indices consistent with Gompers & Lerner (2003). The BHARs
and WRs show the opposite, the average three year buy-and-hold returns for the IPOs in this sample
range from -15% to -18%. The wealth relatives were all below one averaging around 0.80. These
results on the BHARs and WRs show that IPOs underperformed against the benchmarks, consistent
with Ritter (1991). The analysis when splitting the sample in age groups shows that the youngest age
groups show the highest abnormal returns confirming Ritter & Welch (2002). When investigating
long-run performance by year, results show that IPO underperformance was most persistent in the
earlier years of the sample. IPOs in more recent years appear to over perform on average, which is in
line with conclusions made by Hoechle & Schmid (2009).

The regressions analysis shows that firm age at time of the IPO negatively affects subsequent
performance. However, as the results are not statistically significant, firm age is not an appropriate
variable to determine long-run performance. The regression results furthermore show that of the
explanatory variables, only initial returns and venture backing are appropriate predictors for long-run
IPO returns.

The somewhat conflicting results in this study indicate that the research on long-run IPO
performance highly depends on the methodology used. This is reflected by the opposite results of the
CARs on one side, showing no underperformance, and the BHARs and WRs on the other hand
indicating long-run IPO performance. Furthermore, it appears that IPOs in the earlier years of the
sample underperformed on average, while IPOs in more recent years over performed. This might
explain why a large part of the studies found long-run underperformance, as the majority of these
studies use sample periods ending before the year 2000. From these observations and the regression
results, it became apparent that considerations on measurement techniques, sample periods and
benchmarks all influence the results in their own way. Therefore, one must be careful in making
definitive conclusions on long-run IPO performance.

This study adds to the existing literature on IPOs by reexamining the general findings on IPO long-
run performance, and aims to add an argument in the continuing debate on whether or not IPOs
underperform in the long-run. First, this study uses a longer dataset with more recent data, and show
that IPOs do not underperform in more recent years. Second, not many other studies specifically
investigate the relationship of firm age and IPO long-run performance. Furthermore, this study shows
that a combination of certain IPO variables can explain subsequent long-run IPO performance.

The following chapter will discuss the main literature in IPO research, and the development of the
hypothesis for this research. The third chapter describes the data and data collection process, as well
as the results of the descriptive analysis of the data. Chapter four discusses the methods and results

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of the long-run IPO analysis. The fifth chapter shows the regression design and results of the analysis
on the determinants of long-run IPO performance. This paper will be concluded in chapter six, with a
short summary of the chapters, as well as the major implications. The last sections of this paper
consist of appendices and references.

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2 Literature review and hypothesis development

An initial public offering, or IPO, is the sale of stocks by a company to the general public, on a
securities exchange, for the first time. In this process, a private company becomes a public company.
Private companies conduct an IPO to raise outside capital, after which the shares can be traded by the
public. There are many reasons for a company to undertake an IPO. First, a company can conduct an
IPO to raise money, especially when the cost of capital is low. Second, an IPO facilitates for early
investors to cash out. Furthermore, an IPO can increase exposure, which allows for take-over
opportunities. And finally, an IPO may serve as a strategic move, for example to increase reputation
or for enhanced publicity (Brau & Fawcett 2006). Although IPO offers many advantages, there are
also some disadvantages, the biggest amongst these are the significant direct and indirect costs
associated with the IPO process. The direct cost includes the legal, auditing, and underwriting fees,
furthermore as a public company, there are ongoing costs associated with the need to supply
information on a regular basis to investors and regulators. The indirect costs are the management
time and efforts spend in conducting the IPO and the dilution of shares and the loss of control for the
original owners (Ibbotson & Ritter 1995).

2.1 The market for initial public offerings


Over the years, a lot has been written on Initial Public Offerings (IPOs). The market for IPOs shows
several features that are not in line with general findings in market theories. One of the first major
findings in IPO research is that IPOs showed systematic average positive first day returns (Ibbotson
1975). This implies that, on average, the shares in an IPO are underpriced. The first day closing price
is generally used to assess what the true value of the shares according the market must be. If the
closing price is higher than the price at which the shares are offered, it is typically assumed that the
shares are underpriced. When IPOs are underpriced, it potentially means that the initial owners of the
shares leave money on the table when they offer their shares to the market, as they could get a higher
price, reflected by the closing price, for their initial offer.

Another pattern that is observed in the IPO market is that high underpricing is usually followed by a
high volume of new IPOs (Ibbotson 1975). These fluctuation in the IPO market have been dubbed
“hot” and “cold” markets, where hot markets sees high volumes of new issues, while in cold markets
the volume of IPOs are generally lower than average. It is assumed that this fluctuation in issue
volume is caused by companies that try to time their IPO. The owners of a company want the highest
possible price for their shares. When, in a certain period of time, a lot of IPOs have been issued that
were underpriced, it is assumed by the owners of the company that the market values shares higher
on average. The owners want to take advantage of this positive valuation sentiment and offer their
shares in periods where a lot of IPOs are underpriced on average. In cold markets, the volume of IPO
issues is much lower (Ritter 1991).

A third pattern, which gets more attention in recent studies is that of long-term IPO performance.
Starting with Ritter (1991), who was one of the first who documented evidence that IPOs on average
underperform in the long-run, when compared to returns for similar companies or benchmark returns.
This implies that investing in and holding IPO shares for a long period of time will, on average, result
in lower returns than when one would invest in similar non IPO firms or in index stocks for the same
holding period. Due to this observation, one can therefore predict that IPO shares will perform worse
than comparable stocks.

The above mentioned anomalies inspired large bodies of literature trying to investigate and motivate
why IPOs and the market for IPOs behaves as it does. Even though IPO underpricing is not the main

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focus of this study, the following section will start with a short discussion on the evidence of IPO
underpricing, after which the more popular theories on IPO underpricing will be discussed briefly.
The remainder of this chapter will discuss the literature on IPO long-run performance in more detail,
which is the main focus of this study. Initial evidence and the most important theories regarding long-
run IPO performance will be reviewed. Due to space constraints, only literature focusing on IPOs in
the United States will be discussed. This chapter will conclude with a section on hypotheses
development and motivation.

2.2 Underpricing
IPO underpricing is usually defined as the percentage difference between the price at which the
shares were offered to the market and the price at which the shares subsequently traded in the market.
In addition, underpricing can also be measured in terms of “money left on the table” at the
IPO. This is defined as the difference between the aftermarket trading price and the offer price,
multiplied by the number of shares sold at the IPO. Over a long period of time, the average
underpricing in the United States is between 10% and 20%, however, there are large fluctuations over
time (Ljungqvist 2007).

2.2.1 Evidence for underpricing


IPO underpricing has interested financial researchers for decades. Loque (1973) and Ibbotson (1975)
were one of the first to document that when firms go public, the shares they sold seems to be
underpriced. That is, the share price jumped substantially on the first day of trading. This
underpricing fluctuated substantially over the years, with an average underpricing of 21% during the
1960s, this dropped to 12 % in the 1970s, after which it started to rise again to 16% in the 1980s,
21% in the 1990s, and finally 40% from 2000 to 2005 (Ljungqvist (2007)). These initial findings on
the irregularity of underpricing and the fluctuation over the years have inspired large bodies of
literature, especially during the 1980s and 1990s.

In more recent studies, Ritter & Welch (2002) found that the average underpricing of IPOs was
18.8% in the period from 1980 to 2001 in the United States. Furthermore, Loughran & Ritter (2004)
found that the average underpricing in the United States increased from 7% in the period between
1980 and 1989, to 15% from 1990 until 1998, after which it increased to 65% in 1999 and 2000. The
authors argue that this large increase can be attributed to the change in composition of the firms
going public, with a lot of small (technology) firms conducting an IPO during these years. These
studies show that there is a consensus in the literature that IPOs are underpriced on average.
Furthermore, it has been documented that this underpricing fluctuates over time with higher
underpricing in more recent years.

2.2.2 Theories on underpricing

Many researchers have tried to explain the observed underpricing using several different theories.
These theories of under pricing can be categorized into four broad groups. These are; theories based
on asymmetric information, theories based on institutional explanations, theories based on ownership
and control, and behavioural theories (Ljungqvist 2007). These theories will be discussed briefly
below.

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Asymmetric information theories:

The majority of explanations for IPO underpricing are based on asymmetric information. These
theories assume that one of the key parties in an IPO process has more information than the others.
The key parties in an IPO are usually the issuing firm, the underwriters handling the IPO, and the
investors who buy the stock.
Asymmetric information between informed and uninformed investors
One of the most popular asymmetric information model is the winners curse model of Rock (1986).
This model states that some investors are better informed about the true value of the share than
others. This implies that informed investors only bid on IPOs that are attractive (underpriced), while
uninformed investors cannot make this distinction and bid on all IPOs. This causes a “winners curse”
for the uninformed investors as they receive all the shares in overpriced offerings, while in
underpriced IPOs their demand is crowded out and rationed by the informed investors demand, thus
leaving the uninformed investors with predominantly overpriced shares. To keep these uninformed
investors in the market, shares therefore must be offered at a discount to offset the winners curse.

Asymmetric information between the issuer and the underwriter


These theories focus on the role of underwriters, book building methods and share allocation in IPO
underpricing. Baron (1982) argues the underwriters have advanced information about the future
demand of an IPO, compared to the issuers and the investors. When there is much uncertainty about
the true value of an issuer, underwriters face a risk that not all shares are sold during an IPO. To
minimize marketing effort and the sale risk of the IPO, underwriters intentionally underprice the IPO.
Asymmetric information between the issuer and potential investors
Under this assumption, "high quality" issuers are looking to signal their quality to the market by
conducting an intentional underpricing. Better quality companies underprice their issues as they are
confident that they can make up for the money left on the table. These companies use underpricing as
a signal to distinguish themselves from lower quality issues (Welch 1989), but also to leave a positive
note in investors’ minds for future issuance (Ibottson 1975).

Institutional explanations:

These theories can explain IPO underpricing in two major ways, first with legal liability and second
with price support. The first is formulated by Ibotsson (1975), who argues that issuers deliberately
underprice the IPO in order to avoid future lawsuits form investors who are disappointed with the
post issue performance of the share. The second explanation is the price support approach, which
states that underpricing reduces price drops, which stabilizes the price.

Underpricing to avoid legal liability


Tinic (1988) argues that underpricing is due to the legal liability for the underwriter as well as the
issuer. Statements made in the prospectus vouch or guarantee for responsibility in the case of false,
untrue or missing information in the issuing prospectus. Investors are less likely to litigate when
initial returns are higher; therefore, underwriters intentionally underprice to protect their self against
possible future claims.

Underpricing as a means for price stabilization


Ruud (1993) argues that underpricing can be traced back to the price support practice of the
underwriters. That is, on average they know the fair value of the IPO and fix the price accordingly
but underprice the issue in order to avoid negative performance. Furthermore, Asquith, Jones, &
Kieschnick (1998) also argue that underpricing plays a role in price support activities, as is stabilizes
against large drops in prices.

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Ownership and control theories:

Ownership and control theories in IPO underpricing usually follow two opposing views. First,
underpricing is used a mean to entrench managerial control, and to avoid monitoring by large outside
shareholders. Second, underpricing is used to minimize agency cost by encouraging monitoring.

Underpricing to retain control


Brennan & Franks (1997) argue that underpricng gives managers the opportunity to protect their
private benefits by allocating shares strategically when taking their company public. Underpricing
makes that smaller investors can participate which disperse ownership, this reduces external
monitoring. Furthermore, the more dispersed the ownership amongst smaller investors, the smaller
the threat of a hostile takeover.

Underpricng to reduce agency costs


Stoughton & Zechner (1998) argue the opposite. They argue that issuers underprice their securities in
order to attract institutional investors to buy large quantities of shares. This will lead to more
monitoring buy large shareholders; this is usually beneficial for the company and smaller
shareholders.

Behavioural theories:

Some authors try to explain IPO underpricing using behavioural theories. Behavioural theories
assume the presence of “irrational investors” and biases that arise due to investor sentiments or
behavioural biases associated with the issuer.

Investor sentiment
Irrational behaviour of the investors, over-optimism or market-modes can all be explanations as to
why issuers and underwriters underprice IPOs. Welch (1992) argues that underpricing can cause a
domino effect among investors that might raise demand for the issue. Furthermore, Demers &
Lewellen (2003) argue that underpricing brings attention to the stock on the opening day, and
Boehmer & Fishe (2001) document that underpricing increases the trading volume of the stock after
the IPO.

Prospect theory
This theory states that the existing shareholders accept underpricing because they attracted more
attention from investors and high underpricing suggests a relative high increase of the value of the
remaining share. Loughran & Ritter (2002) furthermore argue that issuers are pleasantly surprised
with their new found wealth (the amount they can raise in the IPO), that they are not significantly
concerned with underpricing.

The above discussed theories show that the literature on IPO underpricing has fairly matured. The
notion that IPOs are underpriced on average is widely accepted, as well as the fact that the extent of
underpricing fluctuates over time. But even if short-run underpricing is documented as a persistent
phenomenon in the IPO literature, the degree of underpricing and reasons for underpricing are not
clear because of factors as sample size, sample period, and different measuring techniques and
models. Therefore, there is no single dominant theoretical reason for underpricing. Nonetheless, there
are several theories that try to explain why IPOs are underpriced, with most evidence favour
explanations based on asymmetric information between the market participants in the IPO process.
As there are multiple theories that can explain IPO underpricing, there is still debate as to which
theory is superior.

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2.3 Long-run performance of IPOs
The second major anomaly is the long-run performance of IPOs, which is the main focus of this
study. The initial research on IPOs was predominately focused on IPO underpricing. However, more
recently the long-run performance of IPOs received the majority of the attention. Research on the
long-run performance of IPOs has documented some conflicting results regarding the behavior and
determinants of long-term returns. The articles most relevant for this study will be discussed in more
detail in this section.

2.3.1 Evidence on long-run performance of IPO

Ritter (1991) was one of the first who found and presented empirical evidence of long-run IPO
underperformance. In his paper he documents the anomalous result that in the long-run, IPOs appear
to be overpriced. He used a sample of 1526 IPOs between 1975 and 1984, and he calculated the three
year buy-and-hold returns for the IPOs in the sample. He also calculated the three year buy-and-hold
returns for a set of matching firms, matched by size and industry, listed on the American and New
York stock exchanges. He finds that in the three years after going public, the IPOs significantly
underperformed the set of comparable firms. The average holding period return for the sample of
IPOs 34.47% in the three years after going public, while the average holding period return of the
matching firms was 61.86% over the same period. Furthermore, he shows that younger companies
and companies conducting their IPOs in high volume years perform worse than average. With this
result, he concludes that in the long-run, IPOs underperform. He argues that his results are in line
with the theory that many IPOs follow industry-specific fads and that IPO issuers are taking
advantage of windows of opportunities when investors are irrationally over optimistic about the
future potential.

The findings of Loughran & Ritter (1995) are in line with the initial findings of Ritter (1991). In their
article, they show that IPOs from 1970 to 1990 significantly underperformed relative to non issuing
firms, five years after the IPO date. They used a sample of 4753 IPOs and calculated the three and
five year abnormal performance, adjusting for book-to-market effects, using annual holding-period
returns for both IPOs and a set of matching firms matched on market capitalization. They
furthermore ran cross-sectional regressions on monthly individual firm returns and 3-factor time
series regressions of monthly returns for portfolios of IPOs and the matching firms. They found that
the average return three years after the IPO was 5%, and after five years the average return was
11.6%. The average annual return over the whole five year period after the IPO was 5%, while the
average annual return for the matched firms was 12% over the same period. With their analysis they
reject their hypothesis of no underperformance with high degrees of statistical significance. They
conclude that IPOs underperform in the long-run, and they also found that book-to-market effects can
only explain a small part of the observed underperformance of IPOs. They conclude that their
findings are in line with the theory that cycles in IPO volume are due to issuers taking advantage of
windows of opportunity by issuing equity when, on average, they are substantially overvalued. They
also argue that the rapid growth of many young companies made it easy to justify high valuations
because investors are betting on long shots.

In a more recent study, Ritter & Welch (2002) also confirm, although with some caution, the initial
evidence of long-term IPO underperformance. The authors examine IPO underperformance using a
sample of 6249 IPOs in the United States over the period from 1980 to 2001. They find that the
number of IPOs varies from year to year, and that their shares were underpriced by an average of
18.8%. Furthermore, by calculating buy-and-hold returns for IPOs and matching firms and using
multifactor regressions with an equally weighted portfolio of IPOs, they find that over three years,
the average IPO underperformed the CRSP value-weighted market index by 23.4% and

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underperformed matched companies with the same market capitalization and book-to-market ratio by
5.1%. The authors note, however, that caution is advisable. They claim that the results are sensitive
not only to methodology, but also to the time period chosen and how crisis periods are included.
Furthermore, one must be careful when using Fama-French multifactor regressions, as these can
produce biased results

There are also studies that do not find any significant abnormal performance. Gompers and Lerner
(2003) for example, investigate the performance of IPOs by examining a more extended time period.
Their sample consists of 3661 IPOs over the period from 1935 until 1972, and they measure their
returns for up to five years after listing. The authors find some evidence for underperformance when
performance is measured using value-weighted event-time buy-and-hold abnormal returns, but they
conclude that these results are not consistently statistically significant. However, the
underperformance disappears when either equal-weighted buy and-hold abnormal returns or
cumulative abnormal returns are being used. They argue that the difference between the event-time
and calendar-time results from the clustering of IPOs in periods immediately before poor IPO
performance. They also find, with capital asset pricing model and Fama-French 3-factor regressions,
that the intercepts are insignificantly different from zero, showing no abnormal returns. Finally, they
conclude that the relative performance of an IPO sample depends on the method of examining
performance.

Schultz (2003) also fails to find significant underperformance; however, his explanation differs from
the above. In his paper he claims that the observed long-run underperformance of IPOs is more likely
to appear in event time. He argues that the poor event-time performance of IPOs can be explained by
a phenomenon he calls “pseudo market timing”. He explains pseudo market timing as more firms that
go public when they can receive a higher price for their shares, and as a result, there are more
offerings at peak valuations than at lower prices. This results in that the probability of observing
long-run underperformance in event time is much higher. The author uses simulations with the
distribution of historical market and IPO returns and the relation between the number of offerings and
market levels between 1973 and 1997. His analysis reveals that underperformance of more than 25%
in the five years following an offering is neither surprising nor unusual in event time, but that this is
not an indication of any market inefficiency. He concludes that biases from pseudo market timing can
be avoided by using calendar-time returns rather than event-time returns. Furthermore, he notes that
if event-time returns must be used that the problem of pseudo market timing can be mitigated by
using benchmarks that are as highly correlated with the firms being studied as possible.

However, Ang, Gu, & Hochberg (2007) discuss the findings of Schultz (2003) and in lesser extent
the findings of Gompers and Lerner (2003), and they reject their conclusions. Using a sample of 4843
IPOs between 1970 and 1996, they show that the sample of IPOs exhibits significant
underperformance in both event time and calendar time. They use a self build Markov model that is
able to capture small sample bias. They use this model to generate estimates of small sample
distributions of IPO long-horizon abnormal returns. They compare the small sample distributions
with the estimated point statistics of IPO long-horizon returns from actual data, and they find that the
small sample effect cannot be used as an explanation for the IPO underperformance effect. They
authors find that IPO underperformance remains robust both in event time and in calendar time. They
explain that the different results found by Schultz (2003) are because he is only considering a short
holding period horizon, which does not capture the IPO underperformance. Moreover, they argue that
that IPO underperformance is highly unlikely to be the result of a statistical fluke. They conclude that
the earlier findings of underperformance, starting with Ritter (1991), remains robust in both event
and calendar time.

More recently, Hoechle & Schmid (2009) investigated IPO underperformance with a sample of 7,378
firms going public, in the period between 1975 and 2005. They find that there is significant

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underperformance of IPO firms over the first year after going public, while there is virtually no
underperformance in the following years. They argue that the underperformance disappears, as over
time the characteristics of IPO firms converge to those of the more seasoned companies. They
furthermore find that the observed IPO underperformance is due to fundamental differences in firm
characteristics, like market-to-book ratio, leverage, and R&D spending, between IPO and more
seasoned non-issuing firms. They argue that the documented IPO underperformance is associated
with overly optimistic growth prospects and correspondingly high valuation levels. IPOs going public
during hot issue periods performed even worse on average. They also conclude that IPO
underperformance is likely to be the consequence of imperfect matching procedures. Furthermore,
they argue that in the context of the traditional calendar time portfolio approach the documented IPO
underperformance is likely to be the result of the Fama-French factors not being able to fully explain
variations in the cross-section of stock returns. With these results, the authors conclude that there is
no convincing evidence that IPOs underperform in the long-run.

As one can observe from the articles above, strong consensus is still missing on whether IPOs show
underperformance in the long run. It becomes clear however, that at least some of the conflicting results
can be attributed to differences in sample period and differences in measurement techniques. These
differences across studies result in different conclusions on how IPOs perform in the long-run.

2.3.2 Measurement issues in long-run performance

Abnormal stock returns are in the focus of many different research questions, however, as we can see
from the literature above, there is a debate in the literature on how abnormal returns should be
estimated. There are three main areas of critique. The first discussion focuses on abnormal return
measures mostly measured by using cumulative returns and buy-and-hold returns. The second
discussion focuses on whether long-run performance should be measured in event time or calendar
time. Finally, discussion also focuses on the reference portfolios used to determine abnormal
performance. This section briefly discusses this debate.

Buy and hold returns versus Cumulative average returns


There are two main metrics used in the majority of studies to evaluate long-run performance. The
first is buy-and-hold abnormal returns (BHARs), and the second is cumulative abnormal returns
(CARs). There is still no consensus in the literature about the right metric for a long-term
performance study, as both measures have their strengths and weaknesses. Authors in favor of
cumulative abnormal returns, Fama (1998), Gompers & Lerner (2003), argue that these models are
better and less biased performance measures. They argue that the empirical tests of asset pricing
models typically use monthly returns. Therefore, cumulative average return models are simpler than
buy and hold return models. Furthermore, methods based on average monthly returns reduce the
problem of cross-correlation of returns across events, while buy-and-hold abnormal returns are not
based on monthly average returns.

Proponents of buy and hold return models, like Lyon, Barber, & Tsai (1999) argue that buy-and-hold
abnormal returns accurately mimic investors’ experience. Cumulative abnormal returns do not reflect
the abnormal returns for an investor buying the event firms and shorting the benchmark over the full
horizon. Furthermore, they argue that buy-and-hold returns are better than cumulative abnormal
returns due to monthly portfolio rebalancing assumption associated with cumulative abnormal
returns, which can create a downward bias in long-term CARs. Barber & Lyon (1997) also argue that
when calculated using a reference portfolio such as a market index, CARs are seriously affected by a
new listings bias, and as a result, significance levels of CARs are overstated.

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Event time versus Calendar time
There are two ways of measuring long-run market performance, the first is the mostly used event-
time approach and the second is the calendar-time approach. Some use the calendar-time approach
instead of the event-time approach to evaluate the long-run performance of IPOs. They have argued
that the event-time returns overstate the statistical significance of mean excess abnormal returns
because of the cross-sectional dependence of observations. Some authors like Brav & Gompers
(1997) favor the calendar time approach, as event-time abnormal returns calculated using reference
portfolio can result in miss-specified test statistics. This will have different impact on buy-and-hold
abnormal returns and cumulative abnormal returns. As a result, cumulative abnormal returns yield
positively biased test statistics, while buy-and-hold abnormal returns and the associated test statistics
are generally negatively biased. The calendar time approach avoids cross-sectional dependence
problem because the returns on sample firms are aggregated into a single portfolio.

Nevertheless, the most common approach used to measure the long-run performance of IPOs is the
event-time approach. First, because according to Barber and Lyon (1997), calendar-time returns do
not measure investor experience. Second, Lyon, Barber & Tsai (1999) argue that calendar-time
returns are generally miss-specified in random samples. Third, Loughran & Ritter (2000) argue that
using calendar time returns has lower power to identify time-varying misevaluations.

Reference portfolios
When measuring long-run performance, several benchmarks can be used to evaluate returns. The
most used benchmarks are the markets return, as measured by market indexes, and returns on
reference portfolios of similar companies with respect to size, book-to market or industry. When
using the market return as a benchmark, Loughran & Ritter (2002) argue that long-run returns can be
biased towards no abnormal returns because some of the IPOs firms are included in the benchmarks.
When a benchmark is contaminated with many of the firms that are the subject of the test, than the
test can be biased towards high explanatory power and no abnormal returns. Schultz (2003) argues
however, that when event-time returns are used that the problem of pseudo market timing can be
mitigated by using benchmarks that are as highly correlated with the firms being studied as possible.

In reference portfolios, firms are usually matched by size, book-to-market, or industry. Loughran &
Ritter (1995) argue that it is not advised to match IPOs by industry. First, companies may time their
offers to take advantage of industry wide misvaluation and thus controlling for industry effects will
reduce the ability to identify abnormal performance. Barber & Lyon (1997) furthermore argue that
the use of control firm approach benchmark eliminate rebalancing and skewness bias. However, the
use of size and book to market buy-and-hold reference portfolios does not eliminate this problem,
resulting in the negatively biased test statistics.

The above show that there are different ways in documenting long-run performance. All methods for
measuring and evaluating abnormal returns have advantages and disadvantages. The challenge is to
find the method that is least likely to overstate the results or to introduce bias. Considerations on
sample size, sample period and reference portfolio all influence the decision for the most appropriate
measurement techniques. The different measurement techniques in combination with the
considerations on the research design can heavily affect the eventual results.

2.3.3 Factors Affecting long-run performance

This section will discuss the theoretical and empirical explanations of long-run IPO performance and
the factors that can influence IPO abnormal performance in the long-run. The literature on IPO
aftermarket performance proposes several different theories about the determinants and factors in
long-run performance of IPOs. These theories can be categorized in three broad groups, the first

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group of theories discussing factor prior to an IPO that can influence subsequent performance. The
second group consists of firm and IPO characteristics at time of the offering. The final group consists
of aftermarket factors that can influence long-run abnormal performance. Theories and literature for
each of these groups will be discussed below.

Pre IPO characteristics:

Pre-IPO characteristics are factors that occur before a firm is conducting an IPO. These factors are
mostly based on behavioural theories; a change in the behaviour of firms is noticeable, prior to a
potential IPO.

Window dressing
Window dressing theories state that firms try to make the firm look better prior to an IPO, to achieve
greater valuations. Jain & Kini (1994) proposed this theory in their study. They investigated the
change in operating performance of firms conducting an IPO. They found a significant decline in
operating performance in firms prior to their IPO, over a six-year period extending from the year
before the IPO until five years after the offering. They authors argue that IPOs start out with high
market-to-book, and high price-earnings ratios relative to their industry counterparts but experience a
decline in these measures after the IPO. The authors give several reasons for the decline in operating
performance. One explanation is related to the potential for increased agency costs when a private
firm becomes a public firm after their IPO. A second reason, according to the authors, could be that
managers try to “window-dress” their accounting numbers, to make the firm look better prior to
going public. A third explanation for the decline in operating performance is that entrepreneurs time
their IPOs, and issue in periods of unusually good performance levels, which they know cannot be
sustained in the future. Their results suggests that IPOs are unable to sustain their pre-issue
performance level, and that investors appear to value IPOs based on the expectation that earnings
growth will continue, while in reality the pre-IPO profit margins, on which the expectations are
based, are not sustained in the aftermarket.

Similarly, Teoh, Welch, & Wong (1998), examine in their paper the relation between long-run post-
IPO underperformance and the IPOs earnings management. They show that discretionary current
accruals are higher for IPOs relative to similar seasoned firms. They also find that issuers with higher
discretionary accruals have poorer stock return performance in the subsequent three years. With IPOs
that are ranked in the highest quartile, of the IPO-year discretionary current accruals, show 15% to
30% worse three year performance on average compared to firms in the most conservative quartile.
Additional tests suggest that the ability of accruals to predict IPO underperformance is derived from a
general ability of accruals to predict returns in all firms. Moreover, the former general predictive
ability of accruals is more significant for IPOs because the discretionary current accruals of IPOs are
much larger than those of average non-IPO firms. This result can lead to IPOs that report high
earnings by adopting discretionary accounting accrual adjustments that raise reported earnings
relative to actual cash flows. The above results causes over optimism in investors, because they are
guided by the high earnings, but are unaware that the earnings are inflated. The authors conclude that,
keeping other things equal, the greater the earnings management at the time of the IPO, the larger the
post IPO underperformance.

More recently, Cotten (2008) examined the earnings management explanation for IPO
underperformance. More specifically, he compared the performance matched discretionary accruals
and abnormal performance of IPO firms only issuing primary shares, with IPOs that issue both
primary and secondary shares. Furthermore, regression analysis is used to examine if secondary
shares can explain the level of discretionary accruals, and the relationship of these variables with
long-run performance. The author uses a sample of 6652 IPOs between 1988 and 2002, and his initial
results show that IPOs that only issue primary shares manage earnings upwards, IPOs that issue both

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primary and secondary shares do not manage earnings upwards, while IPOs that only issue secondary
shares manage earnings downwards. He furthermore finds that discretionary accruals are negatively
related with performance over 24 and 36 months. He concludes that earnings management
contributes to the long-run underperformance of IPOs, and the offering of secondary shares
influences subsequent performance.

Market timing
There are also behavior theories that state that owners try to time their IPO to achieve greater
valuations. Yi (2001) examines this in his article. More specifically, he examines whether or not the
long-run performance of IPOs is related to the sign of earnings of the IPO firms at the time of issue.
He motivates that many firms go public while having negative earnings per share, and that these
firms typically project very high growth prospects, which can lead to an overoptimistic valuation of
the IPO. He finds that IPOs underperformed the market index and control firms over a 3 year period
after going public. And even though the long-run median returns indicate that all IPOs
underperformed the NASDAQ index and the set of control firms matched by industry and size, only
the firms going public with negative earnings had statistically and economically significant negative
abnormal mean returns. The author concludes that his finding that the IPO firms with negative
earnings significantly underperformed both the market index and more publicly established firms
suggests that investors may have been too optimistic about future prospects of the IPO firms,
especially those that had negative earnings.

Similarly, Chou, Gombola, & Liu (2009) examined the relation between growth opportunities and
long-run IPO returns and operating performance of 371 IPOs between 1980 and 2000. They use
Tobin’s q as a measure of growth opportunities where IPOs with high Tobin’s Q reflect high growth
prospects. They show that the post-offering performance of IPOs is related to their growth
opportunities. They find significant long-run underperformance in IPOs only for firms with high
Tobin’s q. Furthermore, firms with higher Tobin’s Q experience not only poor stock price
performance but also poor operating performance. The authors hypothesize that the finding of
significant pre-offering run-up and positive earnings forecast revisions in IPOs with high Tobin’s Q,
are both indicators of investor optimism for high growth firms. Their results are consistent with the
view that investors are overly optimistic about the prospects of high growth firms.

Firm and IPO characteristics at time of the offering:

The following section will discuss firm and IPO variables that are observable at time of the IPO, and
their relationship with long-run performance.

Ownership
Several researchers have tried to link the ownership structure to long-run performance. Howton,
Howton, & Olson (2001) examined the role of the board of directors in IPO anomalies. They
investigate the relation between IPO anomalies and the level of share ownership by members of the
board of directors, and several other variables that measures board characteristics. In a sample of 412
IPOs between 1986 and 1994, they investigated the initial day, the one year, and the three year
market adjusted returns. They found that the ownership position of board members, especially inside
members of the board, plays a significant role in each of the three return measures. The initial day
returns are directly related to the percentage of shares outstanding owned by both insiders and
independent outside members of the board. While the one and three year market adjusted returns are
directly related to insider ownership and not strongly related to outside ownership. The authors
conclude that the results do not support the notion that higher board ownership IPOs experience less
underpricing in the short-run, they do however support the idea that high board ownership IPOs
perform better in the long run. Their explanation is that having insiders on the board that are also

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shareholders leads to better alignment between manager and shareholder interests, which can lead to
the observed superior long-run performance for these IPOs.

Similarly, Pukthuanthong, Roll, & Walker (2007) investigate whether the form of managerial
compensation affects a firm's long-term performance. They document the method of equity
compensation and operating performance for 5 years after an IPO, in a sample of 897 IPOs conducted
between 1997 and 1999. They found that stock prices of IPOs in the sample declined in the post-IPO
period, even after controlling for the market, comparable firms, and standard factor models. They
argue that the stock price performance is less bad for firms managed by executives who are receiving
a balanced form of compensation, in the form of both equity and options. They show that a particular
compensation method is associated with better performance for at least 3 years after the IPO. They
show that IPOs performed better when managers received a balanced combination of stock option
grants and equity ownership. On the other hand, IPOs with unbalanced compensation arrangements;
high equity ownership and few option grants, or many option grants and low equity ownership, do
not perform as well. They conclude that this empirical finding is consistent with theoretical
explanations based on managerial risk aversion and the alignment of managerial and owner
incentives.

More recently, Gao & Jain (2011) analyze the long-run performance of founder and non founder
CEO led IPOs. They investigate whether the post-IPO performance of founder CEO led firms is
superior to that of similar non founder CEO led firms. Additionally, they investigate whether these
results still hold in the context of high technology IPO firms. To test their hypothesis they document
the five year post-IPO investment performance of founder and non-founder CEO led firms in both
high and low technology environments, relative to several benchmarks using buy-and-hold abnormal
returns. They found that while founder CEO led IPO firms outperform non-founder CEO led IPO
firms, the significance of the results depends on choice of benchmark, portfolio weighting method,
and factor regression model used to estimate abnormal returns. As a result, they do not find strong or
consistent evidence of superior long-run performance of founder CEO led IPOs relative to similar
non-founder CEO led IPOs. They do however find consistent evidence that founder CEO that led
high technology IPOs showed significantly higher long-run returns relative to non-founder CEO led
high technology IPOs. They conclude that that the unique nature of founder CEO leadership is
particularly beneficial to IPO firms in high technology environments.

Underwriter
The type of underwriter and their reputation also might influence subsequent IPO performance.
Carter, Dark, & Singh (1998) study the role of underwriters in abnormal IPO performance. The
authors examine several measures of underwriter prestige and their association with initial and long-
run IPO returns. They found that each of the reputation measure for underwriter prestige examined in
isolation, to be significantly related to the initial return. Furthermore, when using long-run holding
period returns, they find that the underperformance of IPO stocks relative to the market over a three
year holding period is less severe for IPOs handled by more prestigious underwriters. They argue that
more reputable underwriters are associated with less short-run IPO under pricing and less long-run
IPO underperformance. Furthermore, they argue that of the measures used to evaluate underwriter
reputation, the Carter-Manaster measure is the best measure to control for underwriter prestige in IPO
long-run performance studies.

More recently, Chang, Chung, & Lin (2010) investigated the nature of earnings management in IPOs,
by looking at the role of underwriter reputation. They use discretionary current accruals as a measure
of earnings management, while controlling for changes in discretionary accruals which can be
attributable to changes in performance. They find that underwriter reputation has a significantly
negative correlation with earnings management. Furthermore, they find a negative relationship
between earnings management and the post-offer performance of an IPO firm’s stocks, but only for

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those firms associated with less prestigious underwriters. The authors argue that prestigious
underwriters will protect their reputation by carefully monitoring and certifying financial information
on IPO firms, which reduces any potential earnings manipulation. Those IPO firms that are
associated with more prestigious underwriters are likely to exhibit substantially less aggressive
earnings management.

Similarly, Dong, Michel, & Pandes (2011) analyze the relationship between the number of managing
underwriters, underwriter reputation, and information production on the long-run performance of
IPOs. They study a sample of 7407 IPOs issued between 1980 and 2006, and they test whether the
quality of underwriters influences the three year long-run performance of IPOs, while control for size
and book-to-market effects. Furthermore, they test whether underwriter quality has a greater effect on
long-run performance when uncertainty about IPOs is higher. They find that, when excluding the
internet bubble period of 1999 and 2000, the number of managing underwriters and underwriter
reputation positively predicts long-run IPO performance, especially among firms with high
uncertainty. The authors argue that these findings are consistent with the marketing and certification
and screening roles of investment banks, but show little support for the information production role
of underwriters. They conclude that if investors underestimate the importance of certification, they
may overpay in IPOs with poor underwriter quality, which leads to the underperformance of these
IPOs.

Venture backing
There is some evidence that venture backing in IPOs can influence their performance. Brav &
Gompers (1997), who investigate the long-run underperformance of IPOs from 1972 until 1992,
show that this might be the case. They use a sample of 934 venture backed IPOs and 3407 non
venture backed IPOs, and used several measures to investigate the long-run performance in their
sample. First, they show that over a five year period, venture backed IPOs outperformed non venture
backed IPOs, when returns were weighted equally. Value weighing the returns significantly reduces
the underperformance. They furthermore find that the underperformance in the non venture backed
sample is primarily caused by small IPOs with market capitalizations less than $50 million. When
using Fama-French 3-factor regressions, they find that venture-backed companies did not
significantly underperform, while only the smallest non venture-backed firms did. They conclude that
this underperformance is not specifically an IPO effect; because similar size and book-to-market
matched firms that not issued equity perform just as poorly as IPOs. They argue that the
underperformance is a characteristic of small, low book-to-market firms regardless of whether they
conduct an IPO or not.

More recently, Yip, Su, & Ang (2009) analyze whether the choice of underwriters, venture capital
support, industry and their interactions play a role in the long-term performance of IPOs. The sample
of their study consists of 1772 IPOs that issued between 1996 and 2000, and the main focus is on the
effect of choice of underwriters on performance of IPOs. They calculate abnormal monthly returns
for the whole sample in the first 12 months; they furthermore use regression analyses on both
abnormal returns and cumulative abnormal returns to investigate the effect of underwriter choice,
venture capital support as well as industry and their interactions on the long-term performance of
IPOs. They hypothesize that if potential investors demand that the issuing firm hires a reputable
underwriter for certification of information, the aftermarket performances is expected to be different
for IPOs underwritten by highly reputable investment banks and those underwritten by less active
investment banks. They show that in their analysis, only significant underwriter and venture capital
effects, and that industry effects disappears after controlling for the other effects. They conclude that
even though, by the end of the first year, IPOs, on average, underperform the market, investors can
still benefit by investing in IPOs underwritten by highly reputable investment bank, and the returns
will be even higher if these IPOs are financed by venture capitalists.

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IPO prospectus
Some argue that information adopted in the IPO prospectus can reveal factors that can influence
long-run performance. Bhabra & Pettway (2003) study whether the information contained in the IPO
prospectus is related to the subsequent long-run performance. They use a random sample of 242 IPOs
in the United States between 1987 and 1991. The authors show that financial and operating
characteristics as well as offering characteristics have a limited relation with the one year stock
returns. Pre-IPO profitability, spending on R&D, relative offer size, firm size, and number of risk
factors listed in the prospectus all have some relation with the one-year stock returns. However, they
find no evidence that prospectus information is related to long-term performance over three years.
They further find that firms that subsequently reissue equity or merge outperform their matched-firm
benchmarks over three years. Underperformance is most severe for the smaller and younger firms.
The authors conclude that prospectus information is useful in the aftermarket over a short window of
a year and to some extent in predicting subsequent survival or failure, although the value of this
information declines rapidly with time.

R&D spending
There is also research focused on the R&D spending of firms, as this might influence long-run IPO
returns. Guo, Lev, & Shi (2006) examine the relationship between R&D activities of issuers and the
subsequent performance. They used a sample of 2696 IPOs between 1980 and 1995, with R&D
activities as a source of information asymmetry and valuation uncertainty. They find that R&D
activities significantly affect both the initial underpricing of IPOs and their long-term performance.
Furthermore, they find evidence that R&D intensity affects analysts’ forecasts of IPO long-term
earnings. They conclude that the R&D activities of issuers are an important factor in IPO long-run
performance.

After market characteristics:

This section will discuss factors that influence IPO performance, that occur or that are
observable, after a company conducted their IPO.

Analyst following
Analyst following of newly conducted IPO might be an indicator for long-run performance. Rajan &
Servaes (1997) examine the relationship between analyst following and IPO performance. Using a
sample of 2725 IPOs between 1975 and 1987, they document how analyst coverage can influence
IPO performance over three years. They find that higher underpricing leads to increased analyst
following, analysts are overoptimistic about the earnings and growth performance of IPOs and more
firms complete IPOs when analysts are particularly optimistic about the growth prospects of recent
IPOs. They furthermore found that, in the long-run, IPOs perform poorly when analysts are more
optimistic about their long-run growth projections. They conclude that the anomalies associated with
IPOs may be partially driven by over optimism.

More recently, Das, Guo, & Zhang (2006), investigate the ability of analysts to forecast future firm
performance, based on the selective coverage of IPOs. The authors hypothesize that the decision to
provide coverage contains information about an analyst's underlying expectation of a firm's future
prospects, which in turn can predict performance. They examine this using a sample of 4082 IPOs
over the period from 1986 until 2000. The authors find that that in the three subsequent years, IPOs
with high residual coverage have significantly better returns and operating performance than those
with low residual coverage. More specifically, they find that the difference between high and low
residual coverage portfolios of IPOs results in an annualized buy-and hold returns of 8.71% higher
compared to a portfolio of firms matched by size and book-to-market ratio When comparing the
results to a portfolio of matching firms matched by industry, this return is 7.17% higher. The authors

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conclude that this indicates that analysts have superior predictive abilities and selectively provide
coverage for firms where true expectations are favorable.

Initial returns
Initial returns, or initial under of overpricing, in IPOs might also influence long-run returns. In their
paper, Affleck-Graves, Hegde, & Miller (1996) examine the conditional aftermarket performance of
IPOs between 1975 and 1991. They use a sample of 2096 IPOs conducted on NASDAQ. They find
that IPOs that were initially underpriced earn more compared to size matched firms in the first three
months of trading, while overpriced IPOs underperformed in the same period. Additionally they find
that both underpriced and overpriced IPOs exhibit significant underperformance in the subsequent 6
to 24 months, compared to the matched firms. They conclude that there is a strong relationship
between market conditions and the number of overpriced IPOs, and that initial returns might
influence subsequent performance.

Similarly, Purnanandam & Swaminathan (2002) study the valuation and its effect on subsequent
performance of IPOs between 1980 and 1997, using comparable firm multiples. They find that
overvalued IPOs have higher first day returns, but over the next five years they underperformed by
about 20% to 40%, compared with undervalued IPOs. They furthermore show that the
underperformance of overvalued IPOs is robust to various benchmarks and return measurement
methodologies including size and book to market controls and the Fama-French 3-factor model. They
conclude that their findings are in line with the theories based on investor confidence.

More recently, Santos (2010) examines the connection between IPO underpricing and long-term
underperformance. With an initial sample of 6256 IPOs in the United States between 1973 and 2008,
he shows that the average underpricing can determine the degree of subsequent long-run
performance. He furthermore documents that the long-term underperformance of IPOs is driven by
firms that go public in periods of high IPO underpricing. He concludes that investor sentiment is
stronger in high underpricing periods and that the presence of overly optimistic investors in the
market drives prices up. Low quality firms and underwriters then try to exploit these optimistic
investors by issuing equity in periods of high underpricing.
Opening day characteristics
Some claim that opening day characteristics can be an indication of subsequent long-run
performance. Houge, Loughran, Suchanek, & Yan (2001), investigate the relationship of early market
indicators, divergence of opinion and the performance of IPOs. The authors use three opening day
proxies associated with IPOs, to test their role in IPO underperformance. These proxies are: the
percentage opening bid-ask spread, the time of the first trade, and the flipping ratio. The authors
argue that these variables describe the uncertainty faced by different the IPO participants. In their
sample of 2025 IPOs in the United States between 1993 and 1996 they find that IPOs with a wide
initial spread, a late opening trade, or a high proportion of institutional flipping exhibit poor long-
term returns. Their results are robust to indicators of IPO quality such as market capitalization, offer
price, venture capital financing, underwriter prestige, and partial adjustment. They further find that
flipping and time of first trade are more informative measures of long-run performance for large
firms, while the opening spread is a stronger indicator for small firms. The authors conclude that the
flipping ratio, opening spread and time of first trade each captures unique components in the
uncertainty or divergence of opinion regarding IPOs.

Volatility
Gao, Mao, & Zhong (2006) investigate whether divergence of opinion plays a role in IPO long-term
performance. In a sample of 4057 IPOs between 1980 an 2000 in the United States, they use early-
market (the first 25 trading days after issuance) return volatility as their proxy of divergence of

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opinion. They find that IPO early-market return volatility is negatively related to subsequent IPO
long-term returns for up to three years. Furthermore, they find that the negative relation between
return volatility and long-term performance is much stronger for IPOs than for comparable non-IPO
firms matched by size and Standard Industrial Classification (SIC) code. The authors argue that the
negative relation depends on short-sales constraints, and that return volatility is a valid proxy for
divergence of opinion. They conclude that that a wider divergence of opinion in the IPO markets
leads to greater long-term underperformance.

Institutional investors
Some argue that institutional investors also might influence IPO performance. Field & Lowry (2009)
investigates the investments of institutional investors in IPOs, and the effect on performance. The
authors use a dataset of 5890 IPOs between 1980 and 2000 in the United States. They find that over a
one year period, returns of IPOs in the highest institutional holdings quintile are 13.2% higher than
those in the lowest institutional holdings quintile. Furthermore, they find that although firms with the
highest institutional ownership significantly outperform those with the lowest institutional ownership,
they find no evidence that the high institutional ownership firms experience significantly positive
abnormal returns. They argue that much of the difference simply reflects better interpretation of
readily available public information. Individuals disproportionately invest in the types of firms that
earn significantly lower abnormal returns over the long run. They conclude that individuals either
disregard or misinterpret the relevance of readily available public information, and as a result, they
are affected the largest by IPO underperformance.

Acquisitions
There are also other motivations for a firm to go public. Brau, Couch, & Sutton (2012) investigate the
impact of acquisition activity on long-run IPO performance. They use a sample of 3547 IPOs
between 1985 and 2003, and find that IPOs that acquire within a year of going public significantly
underperform for one through five year holding periods, whereas non acquiring IPOs do not
significantly underperform over these time frames. Furthermore, when using cross-sectional and
calendar-time regressions, they show that the acquisition activity of newly public firms plays an
important and previously unrecognized role in the long-run underperformance of IPOs. They
conclude that these results provide evidence on the importance of the acquisition decision in affecting
the long-run stock price performance of IPO firms.
2.4 Conclusion & Hypotheses development
The above listed literature shows that the long-run performance of IPOs is still a debatable subject,
first, because of the controversial and conflicting findings on long-run IPO performance documented
in the literature. Some find evidence for abnormal performance, while others does not find evidence
for abnormal performance. Second, because there is still no convincing theory that explains IPO
long-run market performance. Researchers have tried to explained long-run performance using
behavioral theories, methodological issues and short-run underpricing theories. The methodological
explanations focuses on the horizon used to evaluate long-run performance. The horizon used to
evaluate long-run performance in the literature varies from one year to five years, with most literature
using a horizon of three years. Furthermore, long-run performance is can be evaluated using the
event-time approach and the calendar-time approach, with the majority of the studies using event-
time approaches. The long-run performance also depends on the measurement technique, with
cumulative abnormal returns, buy-and-hold abnormal returns and wealth relatives as the most used
measurement in the event-time approach, while CAPM and FF models are mostly used in calendar-
time approaches. There is also a discussion on what the most significant factors are in IPO long-run
performance, the listed literature shows that there are a lot of candidates for the factor that can
influence performance, each with their own strengths and weaknesses.

2
2

In this section, the aim and hypotheses of this study, which is based on the listed literature, will be
discussed. The aim of this study is to evaluate the long-run performance of Initial Public Offerings on
the NASDAQ stock exchange in the United States. The motivation for the focus on this exchange
comes from, Ritter & Welch (2002), who found that the majority of the samples used in empirical
studies, are comprised of IPOs conducted on NASDAQ. The time period will be from 1980 until
2010, as the majority of IPOs in empirical research are conducted during the 1980s and 1990s (Ritter
& Welch 2002). Furthermore, the sample of IPOs will end in 2010 to include more recent years that
not have been covered in earlier research (Hoechle & Schmid 2009). Second, to evaluate aftermarket
returns, enough long-run data must be available; therefore the year 2010 is chosen as the final year of
this study. To evaluate long-run performance the following hypothesis will be used:

(H1) IPOs on NASDAQ do not show abnormal performance in the long-run compared to the market
index.

The first step is to evaluate whether IPOs on NASDAQ underperforms. If we follow the efficient
market hypothesis, we should expect that IPOs will not underperform. As we already have seen, there
is a lot of discussion on whether or not IPOs underperform, and that this can be influenced by the
methodology used. The long-run performance of IPOs will be evaluated in event time for three years,
with both cumulative abnormal returns as well as buy-and-hold returns, to evaluate how these results
differ in event time. Additionally, conventional t statistics will be calculated to test these results on
statistical significance.

The choice of a three year interval is to facilitate comparisons with other studies, but also to ensure
that the sample period is long enough (Ang, Gu, & Hochberg 2007). The returns will be calculated
against a benchmark of a market index. It follows from the literature that one must be careful in
constructing reference portfolio, and that not all of the matching procedures are appropriate. To
mitigate these problems of constructing reference portfolios, the benchmarks in this study will consist
of market indices. When using market indices, one must be careful which on to use (Schultz (2003).
The benchmarks used in this study are the NASDAQ composite (high correlation), NSYE composite
(moderate correlation), and the S&P 500 index (weakly correlated).

The second aim of this study is to evaluate the role of firm maturity, or age, at the time of the IPO.
Multiple authors, Ritter (1991), Loughran & Ritter (1995) and Ritter & Welch (2002), claim that IPO
underperformance is mostly attributed to young and small companies. This study will try to find and
define what the exact relationship is between firm maturity and other IPO characteristics at time of
their IPO and the subsequent performance. The hypothesis used for this part:

(H2) Firm age and offer characteristics can significantly explain long-run IPO performance.

The intuition behind this hypothesis is that younger firms are associated with more uncertainty. As
younger companies usually do not have years of data available, the market will have trouble in
correctly valuating these companies. As a result, the younger the firm, the larger the abnormal returns
should be. The role of age in performance will be tested by constructing different age groups, where
the three year performance measured by cumulative abnormal returns as well as buy-and-hold returns
will be analyzed.

To evaluate the relationship between age and performance, a simple regression will be used with
three year raw IPO returns as the dependant variable, and firm maturity as explanatory variable. A
combination of other explanatory variables that might influence performance are also included. These
variables are initial returns (Santos 2010), offer size (Hoechle and Schmid 2009), percentage
secondary shares offered (Cotten 2008), and venture backing (Brav and Gompers 1997). With the

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24
3 Data

In this chapter, the data used in this study will be discussed. In the first section, the data collection
process will be explained, as well as the adjustments made to the data to arrive at a final sample. In
the second section, results of the descriptive analyses on the data will be presented.
3.1 Data collection

To evaluate the long-run abnormal returns of common IPOs on NASDAQ, several data sources are
used to collect the data necessary for this analysis. The initial focus is on all common IPOs conducted
on NASDAQ over the period 1980 until 2010, this data as well as IPO identifying information has
been retrieved from Thomson ONE Banker. To calculate firm maturity, company founding dates are
needed for the firms in the sample; these have been downloaded from Jay Ritters personal website 1.
Daily share prices have been obtained from the Center for Research in Securities Prices (CRSP).
Company financials have been obtained from COMPUSTAT, and information for the several index
returns has been collected from YAHOO Finance2.

From the initial sample, several adjustments mostly based on Ritter (1991), have been made. First, all
offerings with an offer price below $1.00 are dropped (penny stocks). Second, the focus is on
common stocks, so closed-end funds, real estate investment trusts, and American Depository
Receipts are excluded from the sample. Furthermore, the IPO must be listed on the Center for
Research in Security Prices (CRSP) daily American NASDAQ tapes within six months of the offer
date. IPOs where no data was available were omitted from the sample. After combining the initial
dataset with the company founding dates and financial data, and adjusting according the above
considerations, 1925 observations of unique IPOs were left in the sample.

3.2 Summary statistics


In this section, the results of the descriptive analyses of the sample are presented. The sample is
sorted by IPO year, and by age groups. In order to investigate what role company age plays during an
IPO, three categories have been created that groups the IPOs by age. Age category 1 reflects young
companies, and consist of all IPOs in the sample that are 5 years or younger. Age category 2 reflects
mature companies, and consists of all IPOs in the sample between 6 and 15 years. Age category 3
reflects old companies, and consists of all IPOs in the sample that are older than 15 years.

3.2.1 IPO characteristics sort by year

Table I shows statistics on offer characteristics sorted by IPO year 3. Per year, the table shows the
number of companies that conducted an IPO during that year. The second column shows us the
average age of the companies when conducting their IPO, calculated as the difference between IPO
year and founding year. The third column shows us the average offer value in millions, calculated as
the offer price multiplied by the number of shares offered. The fourth column shows us the average
number of shares offered in millions. The column Secondary shares shows us the percentage of IPOs
that offer secondary shares, and the column Venture backed shows us the percentage of IPOs that
were venture backed during their IPO.

1. 21 http://bear.warrington.ufl.edu/ritter/FoundingDates.htm
http://finance.yahoo.com/stock-center/
1. 3 For summary statistics of the IPO characteristics see appendix A1
2
5

Table I

IPO characteristics per year


This table shows IPO characteristics per year of the IPO. No. of IPOs represents the total number of
IPOs in a year. Age shows the average age of the IPOs in a given year, calculated as the difference
between the firms IPO year and the firms founding year. Offer value shows the average offer value
in millions US dollars per year, calculated as the total shares offered multiplied by the offer price.
Shares offered reflect the average number of shares offered in millions in a specific year. Secondary
shares show the percentage of IPOs in a year offering secondary shares. Venture backed show the
percentage of IPOs in a year that was venture backed.

No. Shares Secondary Venture


of Offer
Year IPOs Age value
offered shares backed

1980 10 11.1 8.749 0.6585 60 60

1981 15 22.13 18.38 1.046 66.67 60

1982 13 9.154 15.45 1.126 53.85 38.46

1983 53 10.34 21.87 1.544 67.92 45.28

1984 24 13.42 10.88 1.098 66.67 41.67

1985 31 23.81 15.04 1.31 54.84 25.81

1986 72 20.58 14.84 1.337 61.11 22.22

1987 53 17.15 22.44 1.923 43.4 24.53

1988 18 29.78 15.8 1.421 33.33 22.22

1989 28 11.61 21.4 1.877 64.29 53.57

1990 26 13.85 19.65 1.778 50 38.46

1991 66 18.41 26.65 2.205 51.52 40.91

1992 113 17.74 28.16 2.274 42.48 43.36

1993 136 14 29.55 2.329 47.79 36.76

1994 116 16.25 22.95 2.115 50 34.48

1995 137 11.07 37.27 2.899 51.82 51.82

1996 183 11.44 39.04 3.058 38.8 47.54

1997 135 14.63 38.46 3.194 40 41.48

1998 75 12.81 40.28 3.133 36 34.67

1999 150 9.393 81.02 5.278 21.33 66

2000 106 9.566 82.31 5.624 9.43 76.42

2001 17 16.12 83.3 6.111 17.65 70.59

2002 24 15 95.32 6.808 41.67 41.67

2003 23 19.52 129.2 8.589 56.52 52.17

2004 70 13.46 85.84 6.783 35.71 54.29

2005 56 24.75 87.07 6.128 51.79 37.5

2006 65 17.46 93.11 6.967 46.15 52.31

2007 60 10.2 106 7.858 48.33 68.33

2008 5 20.2 80.24 7.343 40 40

2009 11 27.18 250.8 13.42 54.55 54.55


2010 34 15.56 110.8 8.5 50 61.76

Average 14.47 49.85 3.722 43.12 46.91

From table I we can observe that the average number of IPOs per year was the highest during the
1990s. In more recent years, from 2001, the average number of IPOs is much lower per year, and this
number is lower during the height of the crisis years. The average age of the companies at time of

26
their IPO varies over the years, with an average age of 14.47. What we can observe is that the
average age was low during the mid 90s, and this was much lower in 1982, 1999 and 2000.

The column on average offer size shows us that the average offer value grew over time with an
average offer value of $49.85 million. This growth appears to start in 1991, and from 1999 onwards,
the offer value grew extensively. The numbers of shares offered show a similar pattern with the offer
value. The average number of shares offered, with an average of 3.72 million for the full sample,
grew during the 1990s, again with extensive growth from 1999 onwards.

The average percentage of IPOs offering secondary shares is 43.12% for the whole sample, with
large variation across the years. It appears that the percentage of IPOs that offer secondary shares
became somewhat smaller in recent times. The most noteworthy is that between 1999 and 2001, the
percentage of IPOs that offer secondary shares is extremely low compared to the average. The
average number of venture backed IPOs also appears to rise in more recent years. However, between
1999 and 2001 this number was higher on average opposed to the percentage of IPOs that offered
secondary shares, which was lower on average during these years.

The general pattern that can be observed is that the majority of the IPOs in the sample were
conducted during the 90s. The average age varies across the years; however, it appears that the offer
value and the number of shares offered grew over time indicating that more recent IPOs were larger
on average. The last two columns indicate that during high volume years, less IPOs offer secondary
shares while more IPOs are venture backed. This is in line with the general observation that during
the high volume years of the 90s, IPOs were younger, smaller, more venture backed and offered less
secondary shares on average as suggested, amongst others, in Ritter & Welch (2002).

3.2.2 IPO returns sort by year

In table II price and return statistics for the IPOs in the sample are sorted by year

4
. The first two columns show the average number of IPOs and the average offer price over the years.
The third column shows the initial return, or first day return, calculated as the percentage difference
between the first closing price and the offer price. The first month return shows the percentage
difference between the end of first month closing price and the offer price. The first month return
controls for extreme outliers in initial returns. The column 3-year return shows us the average raw
IPO returns over the full period, calculated as the percentage difference between the closing price
after 3 years, or delisting price if a company did not survive for 3 years, and the offer price. The
column money left on the table shows the money owners left for the investors due to the difference
between the offer price and the closing price in the market. This is calculated as the nominal
difference between the offer and first closing price, multiplied by the number of shares sold.

Table II shows us that the average offer price was $12.22, and it appears that the offer price became
somewhat higher in more recent years. The average offer price was lower in the 1980s, but from
1999 onwards this average was higher. The average initial return is 22.23% over the full sample.
These returns vary over the years, but again it appears that these returns were higher on average
during the mid 1990s, with 1999 as an extreme. The first month return show, not surprisingly, a
similar pattern as the initial returns. The first month returns are a bit higher with an average of
25.27%. There is not much difference between the initial and first month returns, however this seems
not to be the case during the mid to end of the 1980s.

4
For summary statistics on IPO returns see appendix A2

2
7
Table II

IPO returns per year


This table shows the average IPO returns per year of the IPO. No. of IPOs represents the total
number of IPOs in a year. Offer price shows the average offer price in a specific year. Initial return
shows the average initial or first day, return calculated as the percentage difference between the
offer price and the first closing price. First month return reflects the average return after the first
month, calculated as the percentage difference between the offer price and the first month closing
price. 3-year return are the average three year raw returns on IPOs in a year, calculated as the
percentage difference between the offer price and the closing price after three years (or the final
price if an IPO is delisted before that date). Money left on table represents the amount, in millions
US dollars, which owners of a firm could receive if the IPO was correctly priced. This is
calculated by multiplying the number of shares with the nominal difference between the offer price
and first closing price.

No. First
Of Offer Initial month 3-year Money left
Year IPOs price return
return return on table

1980 10 14.65 28.1 36.18 23.29 -2.235

1981 15 14 14.73 19.25 19.9 -0.5405

1982 13 12.77 8.101 11.94 -20.57 -1.023

1983 53 13.02 15.94 16.74 -6.146 -2.708

1984 24 8.964 4.689 5.298 14.48 -0.7961

1985 31 10.27 6.581 7.284 -2.45 -0.5401

1986 72 10.68 11.43 10.8 9.596 -1.483

1987 53 10.71 4.007 0.9961 16.98 -1.2

1988 18 9.597 5.591 4.94 13.54 -0.519

1989 28 10.21 8.332 5.986 51.67 -1.229

1990 26 10.31 20.17 23.22 29.15 -3.32

1991 66 11.56 9.816 10.38 35.1 -2.049

1992 113 11.23 15.85 16.87 36.18 -4.042

1993 136 11.82 16.65 17.84 47.25 -4.113

1994 116 9.978 10.68 10.27 57.26 -2.375

1995 137 12.23 22.45 27.73 34.97 -8.479


1996 183 12.26 18.22 21.13 27.86 -7.324

1997 135 11.63 15.14 15.81 40.81 -6.186

1998 75 12.56 33.36 33.06 69.24 -13.06

1999 150 14.34 81.2 97.86 -19.14 -64.8

2000 106 14.24 47.69 57.63 -48.08 -40.61

2001 17 13.41 26.17 28.47 11.01 -20.38

2002 24 13.94 5.23 3.437 83.63 -7.55

2003 23 14.84 13.86 15.32 54.62 -11.59

2004 70 12.18 12.37 15.13 46.44 -10.55

2005 56 14.16 10.75 12.1 27.59 -8.215

2006 65 12.83 13.75 16.57 -8.466 -12.38

2007 60 13.07 17.98 20.08 9.052 -20.31

2008 5 11.6 12.6 25.27 33.9 -5.535

2009 11 15.27 15.82 9.942 49.41 -7.238

2010 34 12.57 12.4 13.53 77.23 -9.881

Average 12.22 22.23 25.27 24.9 -12.93

The average return over three years is 24.9%, which is in line with the initial and first month returns.
However, the three year returns show much more variation over the years, with some years having

28
negative values indicating a loss over three years. It appears that the average three year return is
higher for more recent IPOs, except for some years where the values are negative, like 1999 and
2006.

The last column show the average money left on the table over the years. We can see that in each
year, the IPO owners on average left money on the table, with an average of $12.93 million. And
again this number is much higher in the years 1999 and 2000.

The general picture form table II is that the average offer price as well as the average initial returns
grew over time. This is also the case with the average money left on the table by the owners,
indicating that the IPOs in more recent years were bigger and more underpriced on average.
Noteworthy in this table are the deviating results for the years 1999 and 2000 in the initial return
columns.

3.2.3 IPO characteristics sort by age

In order to investigate what role company age plays during an IPO, three age groups have been
created. Table III and table IV shows us the same variables as in the previous tables, only categorized
by age groups. Age group 1 consists of 621 IPOs, age group 2 consists of 822 IPOs, and age group 3
consists of 482 IPOs.
Table III

IPO characteristics per age group


This table shows IPO characteristics per age group. No. of IPOs represents the total number of IPOs
in a year. Age shows the average age of the IPOs in a given year, calculated as the difference
between the firms IPO year and the firms founding year. Offer value shows the average offer value
in millions US dollars per year, calculated as the total shares offered multiplied by the offer price.
Shares offered reflect the average number of shares offered in millions in a specific year. Secondary
shares show the percentage of IPOs in a year offering secondary shares. Venture backed show the
percentage of IPOs in a year that was venture backed.

No. Of Offer Shares Secondary Venture


Age group IPOs Age value
offered shares backed

1 621 3.161 43.47 3.342 27.86 53.78

2 822 9.341 49.7 3.791 48.3 57.66

3 482 37.77 58.33 4.093 53.94 19.71

A
v
e
r
a
g
e 14.47 49.85 3.722 43.12 46.91

Table III shows us that, that the average age in age group 1 is 3.16 years, the average age in group 2
is 9.34 years and the average age of the oldest group is 37.77 years. Furthermore, we can see that the
offer value is higher for older companies. The offer value is the lowest for the youngest age group,
however there is not much difference with the average offer value of the second group.

This is also the same for the number of shares offered, with older companies issuing more shares.
Furthermore, we can see that the percentage of IPOs offering secondary shares is much lower,
27.86%, for the young companies, while almost half of the mature and old companies offer
secondary shares. The opposite is the case for the percentage of venture backed IPOs .Not
surprisingly; this percentage is much higher for young and mature companies, while only 19.71% of
the old companies are venture backed.

In table IV the return characteristics per age group are presented. The average offer price is
somewhat lower for the younger companies, but in all groups the price is around the average of the

2
9
full sample. The initial return is 30.64% for young companies, which is much higher than the 12.09%
return for old companies. The first month returns show a similar pattern, with young companies
having a higher return than old companies.

Table IV

IPO characteristics per age group


This table shows the average IPO returns per year of the IPO. No. of IPOs represents the total
number of IPOs in a year. Offer price shows the average offer price in a specific year. Initial return
shows the average initial or first day, return calculated as the percentage difference between the
offer price and the first closing price. First month return reflects the average return after the first
month, calculated as the percentage difference between the offer price and the first month closing
price. 3-year return are the average three year raw returns on IPOs in a year, calculated as the
percentage difference between the offer price and the closing price after three years (or the final
price if an IPO is delisted before that date). Money left on table represents the amount, in millions
US dollars, which owners of a firm could receive if the IPO was correctly priced. This is
calculated by multiplying the number of shares with the nominal difference between the offer price
and first closing price.

First
No. Of Initrial month 3-year Money left
Age group IPOs Offer price
return return return on table

1 621 11.91 30.64 34.74 25.6 -19.07

2 822 12.23 21.81 24.38 24.61 -11.64

3 482 12.59 12.09 14.6 24.48 -7.06

A
v
e
r
a
g
e 12.22 22.23 25.27 24.9 -12.93

The average 3-year return is similar across the three groups with all of groups showing returns
around the average of 24.9%. This indicates that after three years, there isn’t much difference in the
raw returns of young and old companies. In the column money left on the table we can see a clear
difference between young and old companies, where owners of young companies leave more money
on the table than old companies. Overall, the results in this table are in line with the results in the
previous tables.

3.3 Conclusion
A first look into the IPO sample shows us that the IPO offer characteristics and returns have changed
over the years. During the 1990s we saw a wave of new IPOs resulting in a high average number of
IPOs during these years. During these years it also appeared that the companies were younger on
average, had lower offer prices and higher initial returns. A more general pattern is that the size of
the offers as well as the numbers of shares offered grew over time, with much higher values in recent
years. Furthermore, during the crisis periods, and especially in 1999 and 2000, IPO characteristics
deviated from the average. During these years, the majority of the IPOs were young companies with
high initial returns, which is in line with the theory of high over optimism (Ritter and Welch 2002).

When splitting the sample in the different age groups, the same patterns are observable. Younger
companies have lower offer value and offer price, but higher initial returns, while the opposite is true
for the old companies. Indicating that investors are more over optimistic in younger IPOs.
Furthermore, younger companies have smaller offers, have lower percentage of IPOs offering
secondary shares, and are more venture backed than older companies. All these patterns are in line
with patterns earlier observed in IPO research starting with Ritter (1991).

3
0
4 Analysis of long-run IPO performance
This chapter discusses the methodology employed in this study to evaluate the long-run performance
of IPOs. In line with past studies, the long-run performance is measured based on stock returns. The
first section discusses the different measures used to evaluate long-run performance in more detail.
The second part of this chapter presents the results of the analysis of long-run performance of IPOs.

4.1 Measures of long-run performance


Following previous literature, starting with Ritter (1991), several measures are used to evaluate the
long-run performance of IPOs. These measures are cumulative abnormal returns (CAR), buy and
hold returns (BHAR), and wealth relatives (WR). The long-run market performance measures were
calculated up to the three years after the IPO, against different market indices using an event-time
approach, to keep the results comparable to prior literature. The benchmarks used are the NASDAQ
composite, NYSE composite, and the S&P500. For all the performance measures, the conventional t
statistics have been calculated.

To calculate the returns over a three year period, the initial return period is defined to be month 0,
and the aftermarket period includes the following 36 months. The event months are defined as
successive 21 trading day periods. Thus, returns for the first month comprise the returns on listed
days 2–22, the second month of returns comprises the returns of listed days 23–43, and so on. A year
is therefore defined as twelve 21-trading day intervals, or 252 days, three years are therefore 756
trading days.

Cumulative abnormal returns


Following prior research, benchmark-adjusted returns for stock i relative to benchmark m in month t
is the difference between the monthly IPO return and the monthly benchmark return, constructed as:

the benchmark-adjusted returns for


stock i relative to benchmark m in
Where month t is, and
the IPO returns and benchmark returns in
and month t respectively.

The next step is to calculate the average benchmark-adjusted return in each month t, where the
average benchmark-adjusted return defined as:

Where the average benchmark-adjusted return in month t is, and is the number of IPOs
in event month t.

Following standard practice, the cumulative benchmark-adjusted aftermarket performance is the


summation of the average benchmark-adjusted returns over the full period:

(1)

is the cumulative abnormal return over the whole period s is, adjusted for benchmark m.
3
1

The normal way of interpreting the CAR value, is that when the CAR takes a positive value, this
indicates that the IPOs outperform relative to the benchmark, while a negative CAR means that the
IPOS underperform relative to the benchmark.

Holding period returns


As an alternative to the use of cumulative average benchmark-adjusted returns, three year holding
period returns are also computed. Following previous literature, the buy and hold excess returns
(BHARs) of stock i relative to benchmark m are calculated as:

(2) ]–[ ]
is the market-adjusted buy-
and-hold return of company i
Where in event month t, is the
monthly raw return on
company i in event month t is the benchmark specific
and monthly raw
returns of the market index.

The usual way of interpreting this statistics, is that when the BHAR takes a positive value IPOs
outperform the benchmark in the long-run. While a negative value of this measure assumes that IPOs
underperform the benchmark in the long-run.

Wealth relatives
As a final measure, wealth relatives (WR) will be calculated inspired by Ritter (1991), this is
calculated as:

(3)

The WR is defined as the IPOs holding period return over the full period, divided by the benchmark’s
holding period return over the same period. A wealth relative greater than 1 indicates that the IPOs
outperformed the benchmark, while a wealth relative less than 1 can be interpreted as IPOs
underperforming the benchmark.

4.2 Results
This section presents the long-run market performance of IPOs based on the three measures
discussed in the previous section. The long-run monthly returns for the full sample will be presented,
as well as the average long-run performance across each age group and for each year.

4.2.1 Monthly abnormal returns

Table V shows the average benchmark adjusted abnormal returns, the cumulative abnormal returns,
and the buy-and-hold abnormal returns in each event month 5. The table consist of the first month,
reflecting the initial return period, as well as the returns after 1 year (12 months), 2 years (24
months), and 3 years (36 months). The different panels reflect the different indices against which the
returns are calculated.
The table shows that the average benchmark adjusted abnormal returns varies over the months.
Against all three benchmarks the average abnormal returns are positive in month 1 and in month 36,
while these returns are negative in month 12 and 24. The cumulative abnormal returns show a

5
For the returns in all the event months in the sample see appendix A3

3
2
clearer pattern. In all three the panels, the IPOs in the sample have positive CARs except for month
24. This indicates that the IPOs over performed against the benchmark in the first and third year after
their IPO. While the IPOs underperformed in year two against the benchmarks. Over three years, the
average CARs range from 2% to 12% across the various benchmarks. This shows that the sample
period clearly matters when investigating long-run performance.

Overall, these results indicate that IPOs did not underperform against the benchmark in this sample.
The t statistics on AR are statistically significant; the t statistics of the CAR are not statistically
significant however. Furthermore, the table shows that both the ARs as well as the CARs are higher
in panel C and highest in panel B with NYSE composite as benchmark.

Table V
Benchmark adjusted abnormal returns
This table shows the average long-run abnormal performance measures in a certain event month calculated against the various
benchmarks. The performance measures are the average abnormal returns (AR), the cumulative abnormal returns (CAR), the buy-
and-hold abnormal returns (BHAR), and the wealth relatives (WR). These measures are calculated for the full sample of IPOs in
the first month, first year (month 12), second year (month 24), and third year (month 36), against different market indices. These
market indices are the NASDAQ composite (Panel A), NYSE composite (Panel B), and the S&P500 (Panel C). t-stat shows the
conventional t statistics, where t statistics in bold are significant at the conventional 5% level.

Panel A

NASD
AQ
Number
Event of t- t- BH t- W
AR stat CAR stat AR stat R
Month IPOs

1 1925 3.354 30.87 3.354 0.8574 3.34 0.85 1.031

12 1909 -1.675 -18.52 1.886 0.5802 -0.5549 -0.17 0.9772

24 1769 -0.7447 -7.097 -4.074 -1.083 -11.26 -2.99 0.8692

36 1558 3.666 8.183 2.893 0.1805 -17.93 -1.12 0.8014

Panel B

NYSE

Number
Event of
t- t- BH t- W
Month IPOs AR stat CAR stat AR stat R

1 1925 3.59 31.29 3.59 0.8692 3.576 0.87 1.034


12 1909 -1.848 -19.73 3.27 0.9719 -0.6245 -0.19 0.9868

24 1769 -0.4074 -3.8 -0.2199 -0.0572 -9.129 -2.38 0.8958

36 1558 4.105 9.162 11.04 0.6883 -15.19 -0.95 0.83

Panel B

S&P50
0

Number
Event of
t- t- BH t- W
Month IPOs AR stat CAR stat AR stat R

1 1925 3.551 31.13 3.551 0.8648 3.536 0.86 1.034

12 1909 -1.88 -20.17 2.994 0.8938 -0.7972 -0.24 0.9824

24 1769 -0.5199 -4.856 -0.779 -0.203 -9.848 -2.57 0.8865

36 1558 4.002 8.901 9.603 0.5969 -15.98 -0.99 0.8196

The calculated BHARs show a different pattern than the CARs in the table. In all three panels, the
buy-and-hold abnormal returns are negative except for the first month. This indicates that the IPOs
over performed in the first month, but they did underperformed on average in the subsequent months.
The calculated BHARs show that the average 3-year buy-and-hold returns against the market indices
is between -15% and -18%, indicating that IPOs underperformed in the long-run.

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3
The wealth relatives show a similar story. The table shows that in all panels, IPOs performed better
than the benchmark in the first month. However, in the next three years this wealth relative is
negative in all panels indicating that the IPOs underperformed against the benchmark. Furthermore,
the underperformance is largest in month 36.

The results on the BHARs and WRs show that underperformance is the most severe when using
NASDAQ as a benchmark, using NYSE as a benchmark shows somewhat lower BHARs. The t
statistics on BHAR show that only the underperformance in year 2 is statistically significant. For the
other years, the results are not statistically significant.

The results presented in table V tells two different stories. Looking at long-run performance using
cumulative abnormal returns as measurement technique shows that the IPOs in this sample did not
underperform compared to the benchmarks. This opposed to the findings of Ritter (1991). These
results are more in line with Gompers & Lerner (2003), who found similar, positive, returns for the
CARs and Hoechle & Schmid (2009) who argue that abnormal performance varies over the years.

However, the buy-and hold returns and the wealth relatives show the opposite. The calculated
BHARs and WRs show a similar pattern found in Ritter (1991) and Ang, Gu, & Hochberg (2007),
showing that IPO did underperform over the long-run. However, the results in this study lack the
statistical significance found in the mentioned studies. Furthermore, figures found for the wealth
relatives are more conservative in this study, suggesting that IPOs do not show the severe
underperformance found in previous studies, when using market indices as benchmarks.
4.2.2 3-year abnormal returns per age group

Table VI shows the average abnormal returns, the average cumulative abnormal returns, and the
average buy-and-hold abnormal returns over three years, across the different age groups. The average
returns are positive, but low and insignificant across each index. The figures on average abnormal
returns suggest that IPOs did not have large significant average abnormal returns.

We can see that in all panels, but especially in panel A, that the cumulative abnormal returns after
three years are higher for the lowest age group. This is somewhat puzzling as this indicates that
younger companies over performed more than older companies. The results are not statistically
significant however. The positive values on the CARs furthermore indicate that across all age groups
and against every market indices, IPOs over performed. Again this result is strongest in panel B
where NYSE composite is used as benchmark.

For the 3-year buy-and-hold returns, the youngest age group show the highest underperformance,
except when NASDAQ is used as a benchmark. In this case, the mature companies, age group 2,
show the highest underperformance. The BHARs are negative across each age group indicating that
the IPOs did underperform over three years. The wealth relatives are in each panel below 1, showing
again the same story as the BHARs. Similar to the holding returns, the wealth relatives are higher for
the oldest age group, and lowest for the youngest age group. This indicates that the younger age
group showed more negative abnormal performance than the older age groups. The wealth relatives
show that over three years, there is IPOs underperform somewhat against the benchmarks.

Splitting the sample across the age groups show the same patterns observed before. The CARs show
that the IPOs over performed on average. While the BHARs and the WRs show that the IPOs
underperformed on average over three years. These results are not statistically significant however.
When focussing on the underperformance shown by the BHARs and WRs, IPOs appear to

3
4
underperform in the long run, and this underperformance is stronger in the younger age groups
consistent with Ritter (1991) and Ritter & Welch (2002).

Table VI
Benchmark adjusted abnormal returns in event month 36 per age group
This table shows the average long-run abnormal performance measures for the different age groups, calculated against the
various benchmarks. The performance measures are the average abnormal returns (AR), the cumulative abnormal returns
(CAR), the buy-and-hold abnormal returns (BHAR), and the wealth relatives (WR). These measures are calculated for each age
group of IPOs after three years (month 36), against different market indices. These market indices are the NASDAQ composite
(Panel A), NYSE composite (Panel B), and the S&P500 (Panel C). t-stat shows the conventional t statistics, where t statistics in
bold are significant at the conventional 5% level.

Panel A

NASDA
Q
Number
of BHA
Age group AR t-stat CAR t-stat R t-stat WR
IPOs
1 621 0.0509 -0.8268 0.1222 0.079 -5.99 -1.33 0.9047
2 822 0.0547 -0.8239 0.0656 0.0629 -6.57 -1.48 0.9182
3 482 0.0597 -0.8008 0.0473 0.0577 -5.58 -1.22 0.9481
Panel B

NYSE
Number
Age of t- t- BH
group AR stat CAR stat AR t-stat WR
IPOs
-
1 621 0.2697 1.005 3.24 0.785 6.09 -1.33 0.9219
-
2 822 0.2749 1.017 3.225 0.7775 4.81 -1.04 0.9423
-
3 482 0.2807 1.042 3.231 0.7766 3.58 -0.75 0.9594

Panel C

S&P50
0
Number
Age of t- t- BH
group AR stat CAR stat AR t-stat WR
IPOs

-
1 621 0.2318 0.6956 2.761 0.6791 6.68 -1.47 0.9125
-
2 822 0.2367 0.7055 2.739 0.6702 5.14 -1.11 0.9365
-
3 482 0.2422 0.7289 2.74 0.6686 3.99 -0.85 0.9558

4.2.3 3-year abnormal returns per year

Table VII shows the average buy-and-hold abnormal returns and wealth relatives after three years
sort by year the company went public 6. The 3-year buy-and-hold returns show variation over the
years, with some years showing negative returns while other years show positive results. It is
noteworthy that across all indices, the IPOs that went public in the years 1989 and 2002 showed high
positive buy-and-hold returns, while these were very low during the 90s. Furthermore we can see that
the majority of IPOs during more recent years show positive buy-and-hold returns. These figures
show that IPO performance varies per year, with some years where IPOs underperform, while other
years IPOs over perform.

The pattern that emerges from the wealth relatives is that they were negative during the 1980s,
showing high underperformance. But they rose to above 1 in the begin 1990s, showing
overperformance of the IPOs during these years. However, during the mid 1990s wealth relatives

6
For all the measures and t stats per year against each benchmark see appendix A4

3
5
starting to drop largely, indicating that IPOs during these years underperformed again. In more recent
years, the wealth relatives appear to be close to or higher than 1, indicating that IPOs in recent years
did not underperform.
Table VII
Abnormal Returns for IPOs per year
This table shows the average long-run abnormal performance measures calculated against the various benchmarks
per IPO year. The performance measures are the cumulative abnormal returns (CAR), the buy-and-hold abnormal
returns (BHAR), and the wealth relatives (WR). These measures are calculated for the full sample and show the
average return in each IPO year, against different market indices. These market indices are the NASDAQ
composite, NYSE composite, and the S&P500.

N S
A &
S P
D 5
A 0
Q NYSE 0
Number
of BHA BH W BHA
Year R WR AR R R WR
IPOs

1980 10 -26.06 0.729 -19.35 0.798 -19.2 0.8003

1981 15 -3.204 0.9576 -0.9596 0.9859 -1.31 0.9837

1982 13 -9.477 0.8902 -6.43 0.9205 -6.319 0.923

1983 53 -10.58 0.8852 -19.5 0.7968 -19.63 0.796

1984 24 -9.518 0.9008 -11.23 0.8848 -11.36 0.8847

1985 31 -14.72 0.8504 -16.76 0.8319 -17.86 0.8226

1986 72 -0.619 0.9667 -8.691 0.8911 -10.58 0.8749

1987 53 2.731 1.011 0.942 0.9946 0.0838 0.9901

1988 18 -7.917 0.9189 -11.47 0.882 -12.86 0.8693

1989 28 15.53 1.136 14.64 1.123 13.01 1.109

1990 26 -9.468 0.8903 -2.666 0.9517 -2.565 0.9537

1991 66 -2.458 0.9728 9.96 1.098 10.41 1.105

1992 113 -7.036 0.9228 1.415 1.009 1.252 1.008

1993 136 -2.311 0.973 3.659 1.033 2.25 1.02

1994 116 -4.627 0.9543 1.685 1.016 -1.101 0.989

1995 137 -12.27 0.8683 -11.8 0.8782 -13.17 0.8664

1996 183 -20.25 0.7898 -18.85 0.8044 -21.94 0.7765

1997 135 -27.87 0.7196 -15.07 0.8358 -20.24 0.7882

1998 75 -1.054 0.9291 31.55 1.272 22.2 1.169

1999 150 -8.304 0.8477 -8.041 0.9164 -5.656 0.9149

2000 106 6.97 1.02 -35.32 0.6223 -26.73 0.6942

2001 17 -4.42 0.953 -10.56 0.8704 -6.337 0.914

2002 24 16.61 1.161 26.93 1.251 29.86 1.283

2003 23 1.266 1.01 -5.296 0.9406 0.0567 0.9923


2004 70 7.073 1.067 0.4215 0.998 6.376 1.057

2005 56 8.717 1.086 3.418 1.029 8.903 1.084

2006 65 8.497 1.061 8.637 1.064 11.07 1.085

2007 60 -6.743 0.9119 0.646 0.9831 -0.05 0.9712

2008 5 -1.581 1.025 12.85 1.183 12.44 1.159

2009 11 -10.8 0.9005 -0.6883 0.9996 -4.968 0.9526

2010 34 -8.303 0.9135 -1.061 0.9834 -5.769 0.9342

By showing the results by year, we can again see that IPOs during the 1990s showed large
underperformance. However as we can also see from the table, is that the IPOs during the 1980s also
underperformed as much when looking at the wealth relatives. Another different pattern is that IPOs

3
6
appear to show no underperformance, or even over perform in the recent years of the sample. This is
consistent with the notion of Hoechle & Schmid (2009) who argue that the sample period plays a
crucial role in finding underperformance.

4.3 Conclusion
The investigation of IPO long-run performance presented in this section, show some conflicting
results. The average abnormal returns were quite low, indicating that IPOs did not have large
abnormal returns in the long-run. The calculated cumulative abnormal returns, between 2% and 12%
across the various indices, show that the IPOs over performed on average over three years. The buy-
and hold returns and the wealth relative show the opposite, these figures show that IPOs did
underperform in the long-run with 3-year BHARs ranging between 15% and 18%, When splitting the
sample in age groups, it appears that the found underperformance is stronger in the younger age
groups.

However because the calculated t statistics show that most of the results are not statistically
significant, the first hypothesis of this study, that IPOs do not show abnormal returns in the long-run,
cannot be convincingly rejected. Finding abnormal performance really depends on the measurement
techniques employed, as the CARs in this study showed IPO overperformance, while the BHARs and
WRs suggests that IPOs appear to underperform in the long-run. Furthermore, differences in samples
periods and measurement techniques result in varying degrees of significance, therefore, it is
problematic to decisively conclude whether IPOs show abnormal returns in the long-run.
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7
5 Determinants of IPO long-run performance

This chapter tries to identify the determinants of long-run IPO performance. To evaluate the major
determinants of long-run IPO performance, a multiple regression model will be developed in this
section. The dependent variable is the 3-year raw return of the IPOs. Age is one of the explanatory
variables, to indentify whether firm age has a relationship with long-run performance. To evaluate
the role of offer specific characteristics, certain offer specific variables are included as explanatory
variables. The first part of this chapter discusses the regression design, and the results will be
presented and discussed in the second part of this chapter.

5.1 Regression design


To capture the effects of several factors in long-run performance of IPOs, a multiple regression
model will be employed where most variables are based on variables used in Ritter (1991). The
multiple regression model will identified the linear relationship between the long-run market
performance and the independent variables age, initial return, offer size, offerings of secondary
shares, and whether or not IPOs are venture backed. Firm size, annual volume and a crisis period
dummy will be used as control variables .The regression will have the following structure:

The dependant variable is the three year raw returns of an IPO, based on Ritter (1991), calculated as

The independent variables are firm maturity, reflected in the regression as ln(1 + AGE), this is based
on Ritter (1991),who argues that underperformance is mainly attributed to younger companies
conducting an IPO. The expectation therefore is that higher firm age should positively influence
long-run performance.
The second explanatory variable is initial return, and is mainly based on the study of Santos (2010).
The expectation is that higher initial return will have a negative effect on long-run performance. The
initial return or underpricing is calculated as the percentage difference between the offer price and the
first day closing price.

Next the offer size, calculated as the offer price multiplied with the number of shares offered, is used
based on Hoechle & Schmid (2009). The expectation is that smaller offers will have a negative effect
on long-run performance.

To test whether offerings of secondary shares influence long-run performance, a dummy variable will
be included. This dummy variable will take the value of 1 if an IPO offers secondary shares. This
will be used as a proxy for ownership effects on long-run performance inspired by Cotten (2008).
The expectation is that when IPOs offer secondary shares, long-run performance will be worse, as the
offering of secondary shares might signal quality of the firm.

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8
The final explanatory variable is whether an IPO is venture backed. A dummy variable will be
included to represent if an IPO is venture backed. Based on Brav & Gompers (1997), the expectation
is that venture backing will have a positive effect on long-run performance.

Several variables will be included as control variables based on the discussed literature. The first
variable is the size of the firm represented by the logarithm of assets. The second control variable is
the yearly volume of IPOs, based on Ritter (1991), which controls for year effects. Finally, a control
variable will be included to control for crisis years 1999 and 2000. IPO returns show different results
when these years are included based on Ritter & Welch (2002). IPOs conducted during crises periods
show more abnormal returns than other years. This can bias the results measured over longer periods
of time.

5.2 Regression results

In this section the regression results are presented 7. The first regression is run on the full sample;
additional regressions with the same variables are conducted for each age group.

Table VIII reports the regression results for each of the regressions. The first variable of interest is
the regression coefficient on firm age. The results on the age coefficient show that age has a negative
relationship with long-run returns in all regression except for age group 2, where there is a positive
relationship. This means surprisingly that older companies should show more underperformance.
However the coefficients are not statistically significant in all regressions, indicating that age is not
an appropriate predictor of long-run IPO performance. Therefore, the second hypothesis can be
rejected, as age is not significant in predicating future performance.

The coefficients on Initial returns are positive in all regressions, and significant in the first, indicating
that higher initial return results in higher long-run return. Again this is somewhat surprisingly, as it is
assumed that higher initial returns result in more over optimism, which negatively affects long-run
performance. The coefficient on offer value shows a negative relationship with long-run
performance, this is only significant for the second age group however. The negative sign of the
coefficient indicates that larger offer sizes perform worse on average after three years. Offerings of
secondary shares have a positive effect on long-run performance except for age group 1. None of the
estimated coefficients are significant however. Venture backing shows a positive relationship with
long-run performance. It is also significant except in the last age group, and this indicates that IPOs
that are venture backed perform better in the long-run.

For the control variables we see that the coefficients for assets are significant except for the first age
group. This indicates that firm size has a positive relationship with long-run performance. Volume
has a positive, but non-significant effect on long-run performance. Crisis period is significant across
all regressions, and has large negative values. This indicates that the results in the crisis period saw
more deviation, and that including these years can largely influence the obtained results.

Based on the coefficients from the regression analysis, we can conclude that age is not a significant
predictor of long-run performance. Therefore, the second hypothesis of a relationship between age
and performance can be rejected. Splitting the sample across age groups did not show any significant
differences. However, the coefficients on initial returns and venture backing in the full sample are
significant. Therefore, we can conclude that certain offer characteristics can explain long-run
performance, but the significance depends on the selected explanatory and control variables.

7
For summary statistics on the variables for the regression see appendix A5

3
9
Table VIII
Regression analysis
This table shows the regression coefficients of the multiple regressions for the full sample, as well as each age group. The dependant variable
are the 3-year IPO raw returns, calculated as the percentage difference between the offer price and the closing price after three years (or the
final price if an IPO is delisted before that date). The explanatory variables are ln(1+age), initial return shows the average initial or first day,
return calculated as the percentage difference between the offer price and the first closing price, ln(Offer value), a dummy variable that takes
the value of 1 if an IPO offers secondary shares, and a dummy variable that takes the value of 1 if an IPO is venture backed. The control
variables that are included are ln(assets), volume calculated as the number of IPOs in a year divided by 100, and a dummy variable for the years
1999 and 2000, taking the value of 1 if an IPO is conducted in these years. The standard errors are in the parenthesis, and the stars represent the
significance of the regression coefficients. Where * p<0.05, ** p<0.01, *** p<0.001 .

3-year IPO
raw returns
Age
grou Age group Age
Full sample p1 2 group 3

Constant 180.6 312.6 195.2 43.22

(-99.18) (-234.1) (-116.7) (-109.2)

Age -3.957 -6.075 6.028 -7.713

(-3.466) (-11.61) (-17.21) (-8.292)

Initial Return 0.246* 0.268 0.273 0.209

(-0.123) (-0.151) (-0.267) (-0.289)

Offer value -13.05 -21.76 -17.38* -2.058

(-6.693) (-16.16) (-7.586) (-6.784)


Secondary
shares 2.81 -8.247 11.31 2.377

(-6.139) (-11.73) (-10.28) (-9.468)

Venture backed 14.73* 27.40* 19.17* 7.236

(-6.297) (-13.91) (-9.074) (-12.39)


Assets 12.32* 13.12 14.14** 12.77*

(-5.621) (-12.8) (-4.817) (-6.076)

Volume 5.821 10.36 9.938 -3.502

(-4.018) (-9.05) (-5.616) (-6.294)

Crisis period -83.17*** -108.8*** -71.63** -41.14*

(-12.42) (-19.26) (-25.66) (-17.12)

N 1883 605 818 460

R-sq 0.047 0.083 0.039 0.031

adj. R-sq 0.043 0.071 0.029 0.014

squared error 125.5 144 126.5 93.07

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0
6 Summary and conclusions

The main objective of this study was to investigate IPO long-run performance and its determinants.
Previous literature show mixed results on the long-run performance of IPOs. Some have shown that
IPOs tend to underperform in the long-run (Ritter 1991, Ritter & Welch 2002, Ang, Gu, & Hochberg
2007). Explanations for the observed underperformance argue that cycles in IPO volume and
performance are due to issuers taking advantage of windows of opportunity by issuing equity when
they are, on average, substantially overvalued. Another explanation is that the rapid growth of many
young companies made it easy to justify high valuations because investors are betting on long shots.
Other studies find no underperformance, or argue that the observed underperformance results from
empirical issues (Schultz 2003, Gompers &Lerner (2003), Hoechle & Schmid 2009). These
explanations focus on issues in measurement designs and sample periods considered. Another
explanation is that IPO underperformance is likely to be the consequence of imperfect matching
procedures.

This study aims to investigate long-run abnormal IPO performance, controlling for certain issues
raised in previous literature. In this study, special attention is given to the role of firm age, or firm
maturity at time of the IPO. Additionally, this study investigates whether certain firm and offer
characteristics can significantly impact long-run returns. This study investigates three year
performance using cumulative abnormal returns, buy-and-hold returns, and wealth relatives. The
sample consists of common stock NASDAQ IPOs conducted between 1980 and 2010. The IPO
returns will be compared with several benchmark returns to investigate abnormal performance. The
benchmarks employed are the NASDAQ composite, the NYSE composite and the S&P 500.

The results of this study shows that when measuring IPO long-run performance using CARs, IPOs
appear to over perform against the benchmarks, with CARs ranging between 2% and 11%. Results of
long-run performance measured with buy-and-hold returns and wealth relatives indicate that IPOs did
underperform In the long run. The BHARs range between 15% and 18% and the wealth relatives
across the different benchmarks range from 0.8 to 1 in all groups. This evidence suggests that IPOs
did underperform in the long-run. However, the insignificant t statics show that the observations on
long-run abnormal returns are sensitive to the design of the research. When dividing the sample
across the age groups, the observed underperformance was highest among the youngest companies.
Furthermore, the abnormal performance varies over the years, where in recent years; IPOs did not
underperform on average. This might explain why a large part of the literature on IPOs show
underperformance, as most of these studies only considers sample periods that end around the year
2000. However, as these results are not statistically significant, no decisive conclusions can be made
on long-run abnormal performance of IPOs. Therefore, the first hypothesis of IPOs showing no
abnormal performance cannot be rejected.

A second major discussion in prior literature is what the major determinants are in long-run IPO
returns. Multiple variables have been considered as prime candidate to predict long-run IPO
performance. Some studies suggest that behavioral characteristics prior to the IPO can explain
subsequent performance (Jain & Kini 1994, Teoh, Welch, & Wong 1998, Cotten 2008)
Other studies suggest that offer characteristics such as choice of underwriter (Carter, Dark, & Singh
1998), venture backing (Brav & Gompers 1997), or ownership characteristics (Gao & Jain 2011) are
more appropriate in explaining long-run returns. A different strand of literature focuses on market
factors after the IPO affecting returns, such as analyst following (Rajan & Servaes 1997), initial
returns (Santos 2010), and opening day characteristics (Houge, Loughran, Suchanek, & Yan 2001)
This study investigates whether age of the firm at time of the IPO has an effect on subsequent
performance. A multi factor regression model is used where three year raw IPO returns is used as a
dependant variable, and age as an explanatory variable. The regression is used for each age group, to

4
1
investigate whether the variables are sensitive to the difference in sample. Furthermore, several other
firm and offer characteristics are included in each regression to investigate the effect of these
variables in long-run IPO performance. The other explanatory variables, next to age, are initial
returns, offer size, the percentage of IPOs offering secondary shares, and whether or not IPOs were
venture backed.

The results from the regression analysis show that age does not have any significant effect on
subsequent three year performance for each category. From the firm and offer specific variables, only
initial return and venture backing have significant effect on long-run IPO performance. Therefore, the
second hypothesis can only be partly rejected, as IPO performance is related to certain offer
characteristics.

In conclusion, the analysis showed that the outcome of long-run performance in the three years after
listing varied by performance measure. When the study analyzed the full sample using CARs, the
IPOs over performed, whereas when BHARs and were used, the IPOs underperformed. The results
on the performance per age group and per year are similar to earlier observed patterns. Younger
companies show more IPO underperformance and the majority of the underperformance stems from
the earlier years in the sample. This might explain why previous research found large evidence of
IPO underperformance. It appears that the observed results depend highly on the measurement
techniques as well as the initial sample and sample period. The results on determinants of long-run
performance show that only initial return and venture backing are significant in explaining IPO
returns.

The implications of this study might be useful for several parties involved in initial public offerings.
Investors can use the evidence from the literature to optimize their trading strategies. The
determinants of long-run IPO performance help to identify the reasons for long-run performance,
beneficial for the owners of the company. Furthermore, the contradicting results based on the CAR
and BHAR measures may motivate researchers to examine this area further.

There are some limitations, which were difficult to control for, in this study. First, this study
examined the long-run IPO performance for up to three years after the IPO, consistent with previous
studies. This period may not be the most appropriate period as the measures of returns showed
varying values across the years. This study found inconsistency in the long-run performance in the
first two years compared with the third year. Furthermore, this study analyzed the long-run market
performance based on the event-time approach. Some prior studies have analyzed long-run
performance using both the calendar time approach and the event-time approach, and these studies
reported different results. To get a full picture, calendar-time approach can be considered. In
addition, using market indices as benchmarks and conventional t statistics, the results might be
biased. This can be alleviated using different benchmarks and t statistics. Finally, the results in this
study indicate that IPOs did not underperform in more recent years. Further investigation including
more recent years is necessary to test if this pattern is persistent.

4
2
Appendix
A1

Table A.I
Benchmark adjusted abnormal returns
This table shows the summary statistics of the IPO characteristics. No. of IPOs
represents the total number of IPOs in a year. Age shows the average age of the
IPOs in a given year, calculated as the difference between the firms IPO year and
the firms founding year. Offer value shows the average offer value in millions US
dollars per year, calculated as the total shares offered multiplied by the offer
price. Shares offered reflect the average number of shares offered in millions in a
specific year. Secondary shares show the percentage of IPOs in a year offering
secondary shares. Venture backed show the percentage of IPOs in a year that was
venture backed.

standard
Variable mean median smallest largest
deviation

No. Of IPOs 99.78961 113 49.0726 5 183

Age 14.46597 8 18.6256 0 129


Offer value 49.85102 33.25 90.6549 0.3795 2745.5

Shares
3.721633 2.75 4.82725 0.033 144.5
offered

Secondary
43.11688 0 49.5368 0 1
shares

Venture
46.90909 0 49.9173 0 1
backed

A2

Table A.II
Benchmark adjusted abnormal returns
This table shows the summary statistics of the IPO returns. No. of IPOs represents the
total number of IPOs in a year. Offer price shows the average offer price in a specific
year. Initial return shows the average initial or first day, return calculated as the
percentage difference between the offer price and the first closing price. First month
return reflects the average return after the first month, calculated as the percentage
difference between the offer price and the first month closing price. 3-year return are
the average three year raw returns on IPOs in a year, calculated as the percentage
difference between the offer price and the closing price after three years (or the final
price if an IPO is delisted before that date). Money left on table represents the amount,
in millions US dollars, which owners of a firm could receive if the IPO was correctly
priced. This is calculated by multiplying the number of shares with the nominal
difference between the offer price and first closing price.

standard
Variable mean median smallest largest
deviation

No. Of IPOs 99.78961 113 49.07258 5 183

Offer price 12.21668 12 4.467362 1.33 48

Initial return 22.22571 9.523809 45.07298 -43.26923 605.5555

First month
25.27123 10.71429 52.89092 -50.7 667.3295
return

3-year
24.89505 -7.87037 127.3031 -99.92142 1474.479
retrun

Money left
-12.92941 -1.9125 46.53424 -1072.688 30.0001
on table

43

A3

Table A.III
Abnormal Returns against NASDAQ composite
This table shows the average long-run abnormal performance measures in a certain event month calculated. The performance
measures are the average abnormal returns (AR), the cumulative abnormal returns (CAR), the buy-and-hold abnormal returns
(BHAR), and the wealth relatives (WR). These measures are calculated for the full sample of IPOs for the whole sample period of
36 months against the NASDAQ composite. t-stat shows the conventional t statistics, where t statistics in bold are significant at
the conventional 5% level

Number C
Event of AA t- A t- BH t- W
R stat R stat AR stat R
Month IPOs

1 1925 3.354 30.87 3.354 0.8574 3.34 0.85 1.031

2 1925 1.364 14.78 4.718 1.42 4.896 1.47 1.045

3 1925 1.516 15.1 6.234 1.725 7.014 1.94 1.064

4 1925 0.4967 5.109 6.731 1.923 7.403 2.12 1.065

5 1925 0.4824 5.116 7.213 2.125 7.692 2.27 1.065

6 1925 -2.327 -24.78 4.888 1.448 4.298 1.27 1.032

7 1922 0.0394 0.4255 4.928 1.479 4.559 1.37 1.032

8 1921 0.5682 4.843 5.495 1.302 4.032 0.96 1.025

9 1917 -0.6212 -6.889 4.875 1.503 2.448 0.75 1.009

10 1915 -1.041 -11.26 3.834 1.152 1.503 0.45 0.9976

11 1913 -0.2757 -2.936 3.558 1.054 1.249 0.37 0.9939

12 1909 -1.675 -18.52 1.886 0.5802 -0.5549 -0.17 0.9772

13 1902 -1.483 -16.09 0.407 0.1229 -2.569 -0.78 0.9573

14 1891 -0.3882 -1.347 0.0195 0.0019 -4.199 -0.41 0.9402

15 1880 -0.1783 -1.794 -0.1582 -0.0444 -4.312 -1.21 0.9378

16 1868 -0.6126 -6.449 -0.7692 -0.2255 -5.297 -1.55 0.9282

17 1858 -1.119 -11.87 -1.884 -0.5574 -6.788 -2.01 0.9138

18 1842 -0.6717 -6.329 -2.554 -0.6703 -8.098 -2.13 0.9019

19 1832 -0.2725 -2.297 -2.826 -0.6634 -8.358 -1.96 0.8983

20 1822 0.1894 1.765 -2.637 -0.6848 -7.655 -1.99 0.9029

21 1808 -0.5384 -5.181 -3.173 -0.8514 -9.8 -2.63 0.8831

22 1794 0.1171 1.207 -3.057 -0.8786 -10.32 -2.97 0.8789

23 1781 -0.2767 -2.79 -3.332 -0.937 -10.62 -2.99 0.875

24 1769 -0.7447 -7.097 -4.074 -1.083 -11.26 -2.99 0.8692

25 1753 -0.5997 -5.694 -4.671 -1.237 -12.93 -3.43 0.8519

26 1740 -0.8548 -8.837 -5.52 -1.595 -14.43 -4.17 0.8374

27 1724 1.27 5.494 -4.256 -0.5136 -14.84 -1.79 0.8321

28 1708 0.1134 1.014 -4.143 -1.036 -15.14 -3.78 0.8277

29 1686 -0.4766 -4.564 -4.617 -1.235 -16.33 -4.37 0.817


30 1664 0.3673 3.274 -4.252 -1.059 -17.06 -4.25 0.81

31 1646 -0.1555 -1.437 -4.407 -1.137 -17.83 -4.6 0.8038

32 1627 0.3374 3.223 -4.071 -1.087 -18.35 -4.9 0.798

33 1608 2.025 8.573 -2.056 -0.243 -18.53 -2.19 0.7965

34 1593 0.8405 7.312 -1.221 -0.297 -18.42 -4.48 0.7965

35 1577 0.4737 4.231 -0.7509 -0.1877 -18.4 -4.6 0.7974

36 1558 3.666 8.183 2.893 0.1805 -17.93 -1.12 0.8014

44

Table A.IV
Abnormal Returns against NYSE composite
This table shows the average long-run abnormal performance measures in a certain event month calculated. The performance
measures are the average abnormal returns (AR), the cumulative abnormal returns (CAR), the buy-and-hold abnormal returns
(BHAR), and the wealth relatives (WR). These measures are calculated for the full sample of IPOs for the whole sample period of
36 months against the NYSE composite. t-stat shows the conventional t statistics, where t statistics in bold are significant at the
conventional 5% level

Number
Event of AA t- CA t- BH t- W
R stat R stat AR stat R
Month IPOs

1 1925 3.59 31.29 3.59 0.8692 3.576 0.87 1.034

2 1925 1.324 13.51 4.914 1.393 5.198 1.47 1.05

3 1925 1.878 17.94 6.792 1.803 7.927 2.1 1.076

4 1925 0.5815 5.619 7.374 1.979 8.526 2.29 1.081

5 1925 0.6368 6.286 8.01 2.196 8.872 2.43 1.084

6 1925 -2.117 -21.39 5.895 1.656 5.531 1.55 1.05

7 1922 0.5659 5.695 6.461 1.806 6.742 1.88 1.062

8 1921 0.6234 5.047 7.084 1.594 5.487 1.23 1.05

9 1917 -0.489 -5.098 6.595 1.911 3.405 0.99 1.028

10 1915 -1.13 -11.68 5.466 1.57 1.972 0.57 1.013

11 1913 -0.3516 -3.565 5.115 1.443 1.04 0.29 1.004

12 1909 -1.848 -19.73 3.27 0.9719 -0.6245 -0.19 0.9868

13 1902 -1.63 -16.81 1.644 0.4723 -2.598 -0.75 0.9653

14 1891 -0.1911 -0.6613 1.453 0.14 -4.368 -0.42 0.9471

15 1880 0.1437 1.404 1.597 0.4347 -4.343 -1.18 0.9458

16 1868 -0.4905 -4.932 1.107 0.3101 -5.303 -1.48 0.9355

17 1858 -0.8954 -9.201 0.2157 0.0618 -6.667 -1.91 0.9215

18 1842 -0.447 -4.113 -0.23 -0.059 -7.543 -1.93 0.9126


19 1832 0.1247 1.013 -0.1056 -0.0239 -7.361 -1.66 0.9136

20 1822 0.39 3.519 0.283 0.0712 -5.859 -1.47 0.9277

21 1808 -0.1694 -1.569 0.1142 0.0295 -8.738 -2.26 0.9005

22 1794 0.0505 0.5101 0.1645 0.0464 -9.259 -2.61 0.895

23 1781 0.0214 0.2104 0.1858 0.0511 -9.228 -2.54 0.8944

24 1769 -0.4074 -3.8 -0.2199 -0.0572 -9.129 -2.38 0.8958

25 1753 -0.1813 -1.665 -0.4004 -0.1026 -10.89 -2.79 0.8771

26 1740 -0.4383 -4.439 -0.836 -0.2367 -12.39 -3.51 0.8621

27 1724 1.901 8.344 1.057 0.1294 -12.16 -1.49 0.8635

28 1708 0.565 4.89 1.618 0.3915 -12.36 -2.99 0.8616

29 1686 -0.1577 -1.466 1.461 0.3795 -13.91 -3.61 0.8456

30 1664 0.5334 4.678 1.992 0.488 -14.97 -3.67 0.8347

31 1646 0.295 2.678 2.285 0.5794 -15.41 -3.91 0.8296

32 1627 0.4905 4.554 2.773 0.7193 -15.95 -4.14 0.8236

33 1608 2.412 10.1 5.173 0.6047 -16.16 -1.89 0.8213

34 1593 1.009 8.541 6.176 1.461 -15.64 -3.7 0.8264

35 1577 0.7857 6.872 6.955 1.703 -15.75 -3.86 0.8258

36 1558 4.105 9.162 11.04 0.6883 -15.19 -0.95 0.83

45
Table A.V

Abnormal Returns against S&P500


This table shows the average long-run abnormal performance measures in a certain event month calculated. The performance
measures are the average abnormal returns (AR), the cumulative abnormal returns (CAR), the buy-and-hold abnormal returns
(BHAR), and the wealth relatives (WR). These measures are calculated for the full sample of IPOs for the whole sample period of
36 months against the S&P500 composite. t-stat shows the conventional t statistics, where t statistics in bold are significant at the
conventional 5% level

Number
Event of AA t- CA t- BH t- W
R stat R stat AR stat R
Month IPOs

1 1925 3.551 31.13 3.551 0.8648 3.536 0.86 1.034

2 1925 1.332 13.68 4.883 1.393 5.159 1.47 1.049

3 1925 1.842 17.66 6.725 1.791 7.829 2.09 1.074

4 1925 0.5479 5.33 7.272 1.965 8.357 2.26 1.079

5 1925 0.6502 6.476 7.923 2.192 8.673 2.4 1.08

6 1925 -2.14 -21.72 5.785 1.633 5.311 1.5 1.047


7 1922 0.5263 5.344 6.311 1.781 6.381 1.8 1.057

8 1921 0.5758 4.697 6.886 1.562 5.138 1.17 1.044

9 1917 -0.5348 -5.624 6.352 1.856 3.117 0.91 1.023

10 1915 -1.125 -11.68 5.227 1.509 1.762 0.51 1.008

11 1913 -0.358 -3.65 4.87 1.381 0.9582 0.27 0.9999

12 1909 -1.88 -20.17 2.994 0.8938 -0.7972 -0.24 0.9824

13 1902 -1.621 -16.84 1.377 0.3982 -2.835 -0.82 0.9605

14 1891 -0.2197 -0.7577 1.157 0.1111 -4.612 -0.44 0.9423

15 1880 0.1327 1.298 1.29 0.3517 -4.566 -1.25 0.9413

16 1868 -0.5152 -5.206 0.7756 0.2182 -5.554 -1.56 0.9309

17 1858 -0.9032 -9.323 -0.1238 -0.0356 -6.966 -2.01 0.9166

18 1842 -0.4315 -3.981 -0.5541 -0.1424 -7.913 -2.03 0.9073

19 1832 0.122 0.9949 -0.4324 -0.0982 -7.758 -1.76 0.9078

20 1822 0.3645 3.303 -0.0692 -0.0175 -6.43 -1.62 0.9196

21 1808 -0.2225 -2.065 -0.2909 -0.0753 -9.197 -2.38 0.894

22 1794 0.0688 0.6971 -0.2223 -0.0628 -9.694 -2.74 0.8888

23 1781 -0.0391 -0.3865 -0.2613 -0.072 -9.76 -2.69 0.887

24 1769 -0.5199 -4.856 -0.779 -0.203 -9.848 -2.57 0.8865

25 1753 -0.2512 -2.315 -1.029 -0.2646 -11.58 -2.98 0.8678

26 1740 -0.5 -5.062 -1.526 -0.4318 -13.06 -3.69 0.8532

27 1724 1.804 7.82 0.27 0.0327 -12.99 -1.57 0.853

28 1708 0.4531 3.929 0.7202 0.1746 -13.27 -3.22 0.85

29 1686 -0.2067 -1.928 0.5146 0.134 -14.64 -3.81 0.8361

30 1664 0.5092 4.476 1.021 0.2507 -15.59 -3.83 0.8262

31 1646 0.2043 1.858 1.224 0.3109 -16.13 -4.1 0.8203

32 1627 0.4257 3.964 1.647 0.4285 -16.7 -4.34 0.8143

33 1608 2.326 9.75 3.961 0.4636 -16.9 -1.98 0.8121

34 1593 0.9576 8.132 4.913 1.166 -16.44 -3.9 0.8161

35 1577 0.7177 6.288 5.625 1.379 -16.5 -4.04 0.8158

36 1558 4.002 8.901 9.603 0.5969 -15.98 -0.99 0.8196

46
A4
Table A.VI
Abnormal Returns for IPOs between 1980 and 2010
This table shows the average long-run abnormal performance measures in a certain IPO year. The performance measures are the
average abnormal returns (AR), the cumulative abnormal returns (CAR), the buy-and-hold abnormal returns (BHAR), and the
wealth relatives (WR). This table shows the average results per IPO year, and the measures are calculated for the full sample of
IPOs for the whole sample period of 36 months against the NASDAQ composite. t-stat shows the conventional t statistics, where
t statistics in bold are significant at the conventional 5% level

NASD
AQ
Number
Ye of t- t- BH t- W
ar AR stat CAR stat AR stat R
IPOs
198
0 10 -0.816 -0.7121 -0.0943 0.0181 -26.06 -2.303 0.729
198
1 15 0.2686 -0.7137 -0.0948 0.0181 -3.204 -0.2424 0.9576
198
2 13 -1.166 -0.7121 -0.0943 0.0181 -9.477 -0.6967 0.8902
198
3 53 -0.982 -0.7444 -0.0571 0.0281 -10.58 -0.8392 0.8852
198
4 24 -0.4108 -0.7192 -0.0224 0.0386 -9.518 -0.7479 0.9008
198
5 31 -0.1996 -0.8406 -0.0584 0.0291 -14.72 -1.285 0.8504
198
6 72 -0.0216 -0.7951 0.0046 0.0457 -0.619 -0.0164 0.9667
198
7 53 0.4175 -0.751 0.016 0.0485 2.731 0.2227 1.011
198
8 18 -0.1273 -0.7467 -0.096 0.0187 -7.917 -0.6729 0.9189
198
9 28 1.026 -0.7323 -0.0957 0.0184 15.53 1.381 1.136
199
0 26 -0.6647 -0.7622 0.0649 0.0627 -9.468 -0.7586 0.8903
199
1 66 -0.0784 -0.7259 -0.0223 0.0379 -2.458 -0.1405 0.9728
199
2 113 -0.1825 -0.8199 -0.0128 0.0415 -7.036 -0.5876 0.9228
199
3 136 -0.2502 -0.8142 0.0339 0.0543 -2.311 -0.131 0.973
199
4 116 -0.2764 -0.7906 0.0006 0.0446 -4.627 -0.3163 0.9543
199
5 137 -0.6991 -0.8687 0.0924 0.0709 -12.27 -0.9746 0.8683
199
6 183 -1.46 -0.8579 0.1192 0.0781 -20.25 -1.737 0.7898
199
7 135 -1.288 -0.9466 0.159 0.0894 -27.87 -2.407 0.7196
199
8 75 1.51 -0.8064 0.175 0.0929 -1.054 -0.1239 0.9291
199
9 150 1.352 -0.8092 0.3789 0.1493 -8.304 -0.6576 0.8477
200
0 106 3.209 -0.8421 0.107 0.0748 6.97 0.6683 1.02
200
1 17 0.622 -0.8889 -0.0374 0.0356 -4.42 -0.3803 0.953
200
2 24 0.9721 -0.8684 0.0564 0.0607 16.61 1.391 1.161
200
3 23 0.6372 -0.6504 0.2078 0.1017 1.266 0.1151 1.01
200
4 70 0.1664 -0.838 0.0903 0.0693 7.073 0.6806 1.067
200
5 56 0.2404 -0.8669 0.1364 0.0823 8.717 0.8475 1.086
200
6 65 0.4185 -0.8108 0.0453 0.0571 8.497 0.8283 1.061
200
7 60 1.098 -0.8111 0.0783 0.067 -6.743 -0.6549 0.9119
200
8 5 0.1094 -0.7121 -0.0943 0.0181 -1.581 -0.0352 1.025
200
9 11 -0.0567 -0.9339 0.1739 0.092 -10.8 -0.9925 0.9005
201
0 34 -0.1053 -0.7375 0.0216 0.0509 -8.303 -0.7374 0.9135

47
Table A.VII
Abnormal Returns for IPOs between 1980 and 2010
This table shows the average long-run abnormal performance measures in a certain IPO year. The performance measures are the
average abnormal returns (AR), the cumulative abnormal returns (CAR), the buy-and-hold abnormal returns (BHAR), and the
wealth relatives (WR). This table shows the average results per IPO year, and the measures are calculated for the full sample of
IPOs for the whole sample period of 36 months against the NYSE composite. t-stat shows the conventional t statistics, where t
statistics in bold are significant at the conventional 5% level

NYSE
Number
Ye of t- t- BH t- W
ar AR stat CAR stat AR stat R
IPOs

198
0 10 -0.2162 1.159 3.224 0.7632 -19.35 -1.668 0.798
198
1 15 0.2468 1.158 3.223 0.7632 -0.9596 -0.0331 0.9859
198
2 13 -1.205 1.159 3.224 0.7632 -6.43 -0.4022 0.9205
198
3 53 -1.302 1.118 3.223 0.7656 -19.5 -1.621 0.7968
198
4 24 -0.6015 1.142 3.243 0.7735 -11.23 -0.8789 0.8848
198
5 31 -0.3676 1.029 3.172 0.7598 -16.76 -1.416 0.8319
198 72 -0.2839 1.058 3.224 0.7709 -8.691 -0.7261 0.8911
6
198
7 53 0.205 1.095 3.25 0.7762 0.942 0.0849 0.9946
198
8 18 -0.1015 1.126 3.201 0.7608 -11.47 -0.9674 0.882
198
9 28 1.347 1.14 3.21 0.7618 14.64 1.209 1.123
199
0 26 -0.0114 1.087 3.254 0.781 -2.666 -0.1865 0.9517
199
1 66 0.5044 1.13 3.252 0.773 9.96 0.9231 1.098
199
2 113 0.2972 1.037 3.201 0.7672 1.415 0.1496 1.009
199
3 136 0.1159 1.031 3.224 0.7743 3.659 0.3773 1.033
199
4 116 0.0084 1.063 3.219 0.77 1.685 0.2353 1.016
199
5 137 -0.5441 0.97 3.218 0.779 -11.8 -0.9188 0.8782
199
6 183 -0.7194 0.9718 3.233 0.7828 -18.85 -1.614 0.8044
199
7 135 0.5524 0.8751 3.207 0.7819 -15.07 -1.296 0.8358
199
8 75 2.321 1.014 3.292 0.7954 31.55 2.827 1.272
199
9 150 0.8222 0.9762 3.332 0.8174 -8.041 -0.4917 0.9164
200
0 106 1.716 0.9895 3.235 0.783 -35.32 -3.109 0.6223
200
1 17 0.5827 0.9806 3.152 0.7582 -10.56 -0.9393 0.8704
200
2 24 1.248 0.9754 3.205 0.7729 26.93 2.277 1.251
200
3 23 0.2452 1.169 3.329 0.8045 -5.296 -0.449 0.9406
200
4 70 -0.1177 0.9952 3.242 0.7805 0.4215 0.0796 0.998
200
5 56 0.1084 0.9576 3.245 0.785 3.418 0.3421 1.029
200
6 65 0.6715 1.031 3.231 0.7757 8.637 0.7745 1.064
200
7 60 1.638 1.032 3.232 0.7802 0.646 -0.0235 0.9831
200
8 5 0.7142 1.159 3.224 0.7632 12.85 1.207 1.183
200
9 11 0.496 0.8843 3.231 0.7853 -0.6883 -0.0873 0.9996
201
0 34 0.3039 1.114 3.252 0.778 -1.061 -0.0997 0.9834
48
Table AVIII
Abnormal Returns for IPOs between 1980 and 2010
This table shows the average long-run abnormal performance measures in a certain IPO year. The performance measures are the
average abnormal returns (AR), the cumulative abnormal returns (CAR), the buy-and-hold abnormal returns (BHAR), and the
wealth relatives (WR). This table shows the average results per IPO year, and the measures are calculated for the full sample of
IPOs for the whole sample period of 36 months against the S&P500. t-stat shows the conventional t statistics, where t statistics in
bold are significant at the conventional 5% level

S&P50
0
Number
Ye of t- CA t- BH t- W
ar AR stat R stat AR stat R
IPOs

198
0 10 -0.2002 0.8379 2.711 0.651 -19.2 -1.659 0.8003
198
1 15 0.237 0.8365 2.71 0.651 -1.31 -0.0625 0.9837
198
2 13 -1.196 0.8379 2.711 0.651 -6.319 -0.3891 0.923
198
3 53 -1.313 0.7998 2.716 0.6546 -19.63 -1.636 0.796
198
4 24 -0.6588 0.8233 2.739 0.6629 -11.36 -0.8855 0.8847
198
5 31 -0.4444 0.7116 2.675 0.6502 -17.86 -1.513 0.8226
198
6 72 -0.3796 0.7428 2.727 0.6619 -10.58 -0.8922 0.8749
198
7 53 0.1289 0.7799 2.751 0.6667 0.0838 0.0174 0.9901
198
8 18 -0.1718 0.805 2.692 0.6491 -12.86 -1.087 0.8693
198
9 28 1.309 0.8186 2.699 0.6499 13.01 1.067 1.109
199
0 26 0.0044 0.7722 2.763 0.6732 -2.565 -0.178 0.9537
199
1 66 0.5161 0.8117 2.745 0.6622 10.41 0.9666 1.105
199
2 113 0.2401 0.7213 2.706 0.6583 1.252 0.1432 1.008
199
3 136 0.0205 0.718 2.733 0.6662 2.25 0.2624 1.02
199
4 116 -0.1436 0.7481 2.723 0.6611 -1.101 -0.003 0.989
199
5 137 -0.7067 0.6587 2.738 0.673 -13.17 -1.033 0.8664
199
6 183 -1.061 0.6631 2.754 0.6772 -21.94 -1.875 0.7765
199
7 135 0.1358 0.5709 2.739 0.6784 -20.24 -1.739 0.7882
199
8 75 2.217 0.7055 2.812 0.6899 22.2 1.976 1.169
199
9 150 1.128 0.6786 2.879 0.7175 -5.656 -0.3028 0.9149
200
0 106 2.181 0.6801 2.754 0.6768 -26.73 -2.359 0.6942
200
1 17 0.7948 0.6644 2.662 0.65 -6.337 -0.5774 0.914
200
2 24 1.414 0.6631 2.721 0.6661 29.86 2.515 1.283
200
3 23 0.5567 0.861 2.848 0.699 0.0567 0.0062 0.9923
200
4 70 0.1891 0.6846 2.757 0.6737 6.376 0.5951 1.057
200
5 56 0.3237 0.6492 2.767 0.6796 8.903 0.8258 1.084
200
6 65 0.7523 0.7187 2.74 0.6678 11.07 0.9956 1.085
200
7 60 1.59 0.7192 2.747 0.6733 -0.05 -0.0796 0.9712
200
8 5 0.6452 0.8379 2.711 0.651 12.44 1.176 1.159
200
9 11 0.1973 0.5782 2.762 0.6815 -4.968 -0.4491 0.9526
201
0 34 0.0388 0.7969 2.754 0.6688 -5.769 -0.4982 0.9342

49
A5
Table AIX
Benchmark adjusted abnormal returns
This table shows the summary statistics of the regression coefficients of the
multiple regressions. The dependant variable are the 3-year IPO raw returns,
calculated as the percentage difference between the offer price and the closing
price after three years (or the final price if an IPO is delisted before that date). The
explanatory variables are ln(1+age), initial return shows the average initial or first
day, return calculated as the percentage difference between the offer price and the
first closing price, ln(Offer value), a dummy variable that takes the value of 1 if an
IPO offers secondary shares, and a dummy variable that takes the value of 1 if an
IPO is venture backed. The control variables that are included are ln(assets),
volume calculated as the number of IPOs in a year divided by 100, and a dummy
variable for the years 1999 and 2000, taking the value of 1 if an IPO is conducted
in these years

standard
Variable mean median smallest largest
deviation

3-year
24.89505 -7.87037 127.303 -99.92142 1474.479
retrun

ln(1+Age) 2.284943 2.197225 0.91872 0 4.867535


initial return 22.22571 9.523809 45.073 -43.26923 605.5555

ln(Offer
17.25068 17.31956 0.97737 12.84661 21.73323
value)

Secondary
43.11688 0 49.5368 0 100
shares

Venture
0.4690909 0 0.49917 0 1
backed

ln(Assets) 4.119647 4.08153 1.25848 -5.809143 9.85043

Volume 0.9978961 1.13 0.49073 0.05 1.83

Crisis period 0.132987 0 0.33965 0 1

50
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Websites (last visited on 16-06-2015):

http://bear.warrington.ufl.edu/ritter/FoundingDates.htm
http://finance.yahoo.com/stock-center/

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