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Article

IPOs: The Third Year On

Jessica West, Giovanni Fernandez and K.C. Ma
The Journal of Portfolio Management Summer 2017, 43 (4) 137-151; DOI: https://doi.org/10.3905/jpm.2017.43.4.137
Jessica West
is an assistant professor of finance at Stetson University in DeLand, Florida
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Giovanni Fernandez
is an assistant professor of finance at Stetson University in DeLand, Florida
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K.C. Ma
is the Roland George Professor of Applied Investments at Stetson University in DeLand, Florida
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Abstract

An initial public offering (IPO) is basically a market funding event, with young firms signifying their rite of passage to the public capital market. The general public may have treated IPO investing like a lottery simply because they have a minute chance of explosive payoffs; yet historically, IPOs have underperformed the market in their early years. In this study, the authors find that over the last 90 years of U.S. stock market history, there is at best some weak evidence that significant IPO underperformance has existed only in the first two years after issuance. However, the authors show, for the first time, strong evidence that IPOs actually outperformed from the third year on. They postulate that the “reversal of IPOs’ fortune” is a result of private firms exercising a “going public” option while simultaneously creating a “going private” option.

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The Journal of Portfolio Management: 43 (4)
The Journal of Portfolio Management
Vol. 43, Issue 4
Summer 2017
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IPOs: The Third Year On
Jessica West, Giovanni Fernandez, K.C. Ma
The Journal of Portfolio Management Jul 2017, 43 (4) 137-151; DOI: 10.3905/jpm.2017.43.4.137

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IPOs: The Third Year On
Jessica West, Giovanni Fernandez, K.C. Ma
The Journal of Portfolio Management Jul 2017, 43 (4) 137-151; DOI: 10.3905/jpm.2017.43.4.137
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  • Article
    • Abstract
    • IPO ONE-DAY POPS
    • IPO FIVE-YEAR FLOPS
    • WHY SHOULD IPOS BE DIFFERENT?
    • AN OPTION TO GO PUBLIC
    • EMPIRICAL DESIGN
    • THE U.S. IPO UNIVERSE
    • EVENT-TIME VERSUS CALENDAR-TIME PORTFOLIOS
    • BUY AND HOLD VERSUS EQUAL-WEIGHTED RETURNS
    • SURVIVORSHIP BIAS
    • RISK-ADJUSTED PROCESS
    • EVENT-TIME VERSUS CALENDAR-TIME PORTFOLIOS
    • LOTTERY-LIKE IPO RETURNS
    • UNDERSTATING INDUSTRY EFFECT
    • OVERSTATING RISK RETURNS
    • A BRANDING EVENT OR A FUNDING EVENT
    • ENDNOTES
    • REFERENCES
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