Working Paper: CEPR ID: DP4832
Authors: B. Espen Eckbo; Yvind Norli
Abstract: We examine the risk-return characteristics of a rolling portfolio investment strategy where more than six thousand Nasdaq initial public offering (IPO) stocks are bought and held for up to five years. The average long-run portfolio return is low, but IPO stocks appear as ?longshots?, as five-year buy-and-hold returns of 1000% or more are somewhat more frequent than for non-issuing Nasdaq firms matched on size and book-to-market ratio. The typical IPO firm is of average Nasdaq market capitalization but has relatively low book-to-market ratio. We also show that IPO firms exhibit relatively high stock turnover and low leverage, which may lower systematic risk exposures. To examine this possibility, we launch an easily constructed ?low minus high? (LMH) stock turnover portfolio as a liquidity risk factor. The LMH factor produces significant betas for broad-based stock portfolios, as well as for our IPO portfolio and a comparison portfolio of seasoned equity offerings. The factor-model estimation also includes standard characteristics-based risk factors, and we explore mimicking portfolios for leverage-related macroeconomic risks. Because they track macroeconomic aggregates, these mimicking portfolios are relatively immune to market sentiment effects. Overall, we cannot reject the hypothesis that the realized return on the IPO portfolio is commensurable with the portfolio?s risk exposures, as defined here.
Keywords: asset pricing; capital structure; initial public offering; IPO; liquidity; market efficiency; risk; return
JEL Codes: G10; G11; G12; G20; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher stock turnover (G31) | lower expected returns for IPO firms (G24) |
| liquidity risk (G33) | lower expected returns for IPO firms (G24) |
| lower leverage ratios (G32) | lower expected returns for IPO firms (G24) |
| liquidity and leverage (G33) | expected returns on IPO stocks (G24) |
| liquidity risk (G33) | liquidity beta for IPO stocks (G24) |
| lower exposure to leverage-related risk factors (G32) | lower expected returns for IPO stocks (G24) |