Characterizing the Risk of IPO Long-Run Returns: The Impact of Momentum, Liquidity, Skewness, and Investment

• Published in: Financial management Vol. 40; no. 4; pp. 1067 - 1086
• Main Authors: Carter, Richard B., Dark, Frederick H., Floros, Ioannis V., Sapp, Travis R. A.
• Format: Journal Article
• Language: English
• Published: Melbourne, Australia Blackwell Publishing Asia 01.12.2011; Wiley Subscription Services, Inc; Financial Management Association; Blackwell Publishing Ltd
• Subjects: Economic activity; Enterprises; Financial investments; Going public (Securities); Initial public offering; Initial public offerings; Investment; Investment risk; Investments; Large enterprises; Liquidity; Liquidity (Finance); Market value; Price momentum; Rates of return; Regression analysis; Risk assessment; Skewed distribution; Stock returns; Stock shares; Studies; Time series
• ISSN: 0046-3892; 1755-053X
• DOI: 10.1111/j.1755-053X.2011.01171.x

We study 6,686 initial public offerings (IPOs) spanning the period 1981-2005 and find that the new issues puzzle disappears in a Fama-French three-factor framework. IPOs do not underperform in the aftermarket on a risk-adjusted basis and do not underperform a matched sample of nonissuers. IPO underperformance is concentrated in the 1980s and early 1990s, and IPOs either perform the same as the market or outperform on a risk-adjusted basis from 1998 to 2005. We find that outperformance in the later period is driven by large firms. Factors for momentum, investment, liquidity, and skewness help to explain aftermarket returns, although size and book-to-market tend to proxy for skewness. IPO investors receive smaller expected returns due to negative momentum and investment exposure and in exchange for higher liquidity.