Does idiosyncratic risk matter in IPO long-run performance?
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Does idiosyncratic risk matter in IPO long‑run performance? Marie‑Claude Beaulieu1 · Habiba Mrissa Bouden2
© The Author(s) 2019
Abstract This paper studies how firm-level idiosyncratic risk varies over time and affects both initial public offering (IPO) and matched non-IPO firms’ long-run performance. It revisits the traditional approach to compute the long-run performance by conditioning aftermarket performance on idiosyncratic risk with a generalized autoregressive conditional heteroskedasticity GARCH-M extension of the standard three-factor Fama and French (3FF) model. Our findings show a positive long-run relationship between idiosyncratic risk and expected returns for almost all IPOs and matched non-IPO firms. We find that, in general, IPOs do not underperform their peers when we adjust long-run abnormal returns for firm-level idiosyncratic risk. We also note that the idiosyncratic risk exposure depends on the IPO profile; it is more important for firms going public in hot-issue markets, undervalued IPOs and high idiosyncratic-risk issues. Thus, this paper suggests that a part of abnormal returns in specific IPOs long-run performance is derived from firm idiosyncratic risk. Keywords Initial public offerings · Performance measures · Asset pricing · Idiosyncratic risk JEL Classification G10 · G12 · G14
1 Introduction The pricing of initial public offerings (IPOs) has attracted the attention of researchers in finance for decades. The literature identifies three anomalies in the IPO process. The first two anomalies observed in the short-run are, namely, the hot-issue market for IPOs (Ritter 1984) and IPO underpricing (Ritter and Welch 2002). The third anomaly is IPO long-run * Marie‑Claude Beaulieu Marie‑[email protected] Habiba Mrissa Bouden [email protected] 1
Centre de recherche sur le risque, les enjeux économiques et les politiques publiques (CRREP), Département de finance, assurance et immobilier, Faculté des sciences de l’administration, Université Laval, Pavillon Palasis‑Prince, 2325, rue de la Terrasse, Quebec, QC G1V 0A6, Canada
2
Centre de recherche sur le risque, les enjeux économiques et les politiques publiques (CRREP), Institut des Hautes Études Commerciales de Sousse (IHECSO), Département de finance et de comptabilité, Université de Sousse, Route Hzamia Sahloul 3, BP n° 40, 4054 Sousse, Tunisia
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underperformance (Ritter 1991). Ritter (1991) and Loughran and Ritter (1995) report that IPOs underperform the market in the long run when they compare IPO stock returns to common market index returns.1 Other empirical studies on IPO long-run performance present mixed results. Brav and Gompers (1997) and Gompers and Lerner (2003) do not find evidence of long-run IPO underperformance. Barber and Lyon (1997), Kothari and Warner (1997), and Gompers and Lerner (2003) document that IPO long-run performance depends on the methodology used to measure abnormal returns, which could explain the mixed evidence in the behavi
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