The Long-Term Performance of Initial Public Offerings (IPOs): Venture Capitalists, Reputation of Investment Bankers, and Corporate Structure

The Initial Public Offerings (IPOs) literature has uncovered the underpricing, hot issue markets, and long-term underperformance anomalies. The long-term underperformance of IPO firms has gained the focus of recent academic attention. Recent studies document that venture capitalists, and the reputation of investment bankers are associated with the long-term performance of firms going public. The lack of venture capitalists has been shown to relate with the long-term underperformance of IPO firms. On the other hand, IPO firms underwritten by less reputable underwriters have been found to experience more negative long-term market adjusted returns. Unlike previous studies, this study examines the interactive effects of venture capitalists, and the reputation of investment bankers on the long-term performance of IPOs using alternative performance measures. Moreover, we examine the possible interactive effects of institutional ownership with venture capitalists and the reputation of investment bankers. It is argued that the investigation of the joint effects of venture capitalists, reputation of investment bankers, and institutional investors on the long-term performance of IPO firms is more likely to throw additional light on the long-term underperformance of IPO firms than examining the role of these factors independently. In addition, this study investigates whether the corporate structure of the firm is associated with the long-term performance of IPOs. This investigation relies on 456 IPO transactions over the period of 1989–1994. Results based on raw and adjusted buy- and-hold returns show that the reputation of investment bankers on the long-term performance of IPO firms is negligible, if any. These results are inconsistent with the findings of Carter, Dark, and Singh (1998). However, venture backed IPOs with considerable institutional ownership experience superior long-term performance. Consistent with Brav and Gampers (1997), our evidence shows that long-term performance of IPO firms is not significantly different from counterpart IPO firms. Size/book-to-market/industry adjustment not only decreases underperformance of non-venture backed IPO firms, but also eliminates the superior performance of venture-backed IPO firms relative to both, market and non-venture backed IPO firms. Finally, the analysis provides little evidence in support of the corporate diversification hypothesis which states that diversified IPO firms have lower long-term performance in comparison to focused IPO firms