Can Hedge Funds Explain Long-Run IPO Success? Evidence of an Inverse Relationship

IPO success research is rooted in long-run underperformance and the underpricing puzzle, which is attributed to asymmetric information between informed and uninformed investors. Our purpose is to determine if hedge fund performance can explain long-run IPO success. We fill in two research gaps. First, our long-run study extends the recent research on the role of hedge funds in explaining short-run U.S. IPO success. Second, we address the scarcity in long-run IPO research by testing periods beyond 3-to-5 years. Our main IPO success measure is a function of net proceeds and post-IPO market prices. This measure, used in recent short-run IPO success research, has a different interpretation when applied to long-run tests. This is because long-run price performance replaces mispricing as the major consideration. We find that hedge funds perform well for periods over a year when long-run IPO success is poor. In contrast, stocks similar to IPO perform well when IPO success is better. The Vuong test shows that the hedge fund returns specification provides a better fit to the observed data than market returns. Long-run findings differ from short-run findings as market performance now exercises both an opposite and stronger association with IPO success compared to hedge fund performance.