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Is Institutional Investment in Initial Public Offerings Related to Long-Run Performance of These Firms?

Abstract

The phenomenally poor long-run performance of initial public offerings has been documented in the academic and business literature for many years now, yet investment in these firms continues to be as popular as ever. This study examines the holdings of institutional shareholders soon after the offering date and finds that initial public offerings having larger institutional shareholding tend to subsequently earn significantly higher long-run returns than those with smaller institutional shareholdings, even after controlling for several firm characteristics. Indeed, we find that initial public offerings with higher institutional ownership soon after the offering date do not appear to significantly underperform a portfolio of seasoned firms matched by firm size, while initial public offering with smaller institutional shareholdings frequently earn less than the risk-free rate in the long-run.

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