Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies

We investigate the long-run underperformance of recent initial public offering (IPO) firms in a sample of 934 venture-backed IPOs from 1972–1992 and 3,407 nonventure-backed IPOs from 1975–1992. We find that venture-backed IPOs outperform non-venture-backed IPOs using equal weighted returns. Value weighting significantly reduces performance differences and substantially reduces underperformance for nonventure-backed IPOs. In tests using several comparable benchmarks and the Fama-French (1993) three factor asset pricing model, venture-backed companies do not significantly underperform, while the smallest nonventure-backed firms do. Underperformance, however, is not an IPO effect. Similar size and book-to-market firms that have not issued equity perform as poorly as IPOs.