The performance of IPOs excluding the jump
Studies in Economics and Finance
ISSN: 1086-7376
Article publication date: 29 May 2018
Issue publication date: 20 June 2018
Abstract
Purpose
This paper aims to examine performance of firms with a negative second-day return after the Initial Public Offering (IPO) relative to stocks with a positive second-day return after the IPO. Loughran and Ritter (1995) document that firms which have done an IPO or an SEO underperform similar firms over three- and five-year investment horizons. Loughran and Ritter (2002) also document that firms that go public “leave money on the table”, with this amount being almost twice as large as the fees paid to the investment banks.
Design/methodology/approach
The study’s null hypothesis is that stocks with a negative return on the second day of the IPO perform better than firms with a positive return on the second day of the IPO. The authors estimate the second-day return based on first- and second-day closing prices from the Center for Research in Security Prices, and they use a regression model and Jensen’s alpha to test the hypothesis.
Findings
The authors find evidence that rejects the paper’s working null hypothesis of superior performance of negative second-day return IPO firms relative to positive second-day return IPO firms in the three-year and five-year period samples. They fail to find statistically significant evidence in the entire period samples which suggest that negative second-day return IPO firms perform similarly to positive second-day return IPO firms.
Originality/value
The findings in this study raise interesting questions with regards to the ideas developed by Loughran and Ritter (2002) and the “money left on the table”. These findings are of interest to both entrepreneurs and investment bankers who advise them during the underwriting process. If there is not a benefit in terms of IPO performance to investors, then the question becomes – shouldn’t owners possibly consider actually “taking money from the table”. After all, the return to investors will be the same either way but if entrepreneurs make more money at IPO they would be motivated to start more companies in the future.
Keywords
Acknowledgements
The author would like to thank the journal editor Niklas Wagner and two anonymous referees for the insightful comments. Any errors are the author’s own responsibility.
Citation
Ivanov, S.I. (2018), "The performance of IPOs excluding the jump", Studies in Economics and Finance, Vol. 35 No. 2, pp. 273-286. https://doi.org/10.1108/SEF-11-2016-0264
Publisher
:Emerald Publishing Limited
Copyright © 2018, Emerald Publishing Limited