Myth or Reality? The Long‐Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital‐Backed Companies

TLDR

The study examines whether venture‑backed and non‑venture‑backed IPOs underperform in the long run. Using a sample of 934 venture‑backed IPOs (1972‑1992) and 3,407 non‑venture‑backed IPOs (1975‑1992), the authors compare equal‑weighted and value‑weighted returns and benchmark against Fama‑French factors. Venture‑backed IPOs outperform non‑venture‑backed IPOs on equal‑weighted returns, but value weighting and size effects largely eliminate underperformance, and the smallest non‑venture‑backed firms underperform only when size is considered, indicating that underperformance is not an IPO effect but a size and book‑to‑market phenomenon.

Abstract

ABSTRACT We investigate the long‐run underperformance of recent initial public offering (IPO) firms in a sample of 934 venture‐backed IPOs from 1972–1992 and 3,407 nonventure‐backed IPOs from 1975–1992. We find that venture‐backed IPOs outperform non‐venture‐backed IPOs using equal weighted returns. Value weighting significantly reduces performance differences and substantially reduces underperformance for nonventure‐backed IPOs. In tests using several comparable benchmarks and the Fama‐French (1993) three factor asset pricing model, venture‐backed companies do not significantly underperform, while the smallest nonventure‐backed firms do. Underperformance, however, is not an IPO effect. Similar size and book‐to‐market firms that have not issued equity perform as poorly as IPOs.