Liquidity risk,leverage and long-run IPO returns |
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| Institution: | 1. Department of Accounting, Finance and Economics, Griffith Business School, Nathan campus, Griffith University, Nathan, QLD 4111, Australia;2. Department of Accounting and Finance, University of Strathclyde, Scotland G4 0QU, United Kingdom;1. Victoria Institute of Strategic Economic Studies, Victoria University, Melbourne, Australia;2. Directorate General of Taxes, Ministry of Finance, Jakarta, Indonesia;1. College of Management, Yuan Ze University, No. 135, Yuan-Tung Road, Chung-Li, Taiwan;2. Department of Business Administration, College of Business, National Taipei University, No. 151, University Rd., New Taipei City, Taiwan;3. Department of Statistics, College of Business, National Taipei University, No. 151, University Rd., New Taipei City, Taiwan;1. College of Management, Georgia Institute of Technology, USA;2. Manchester Business School, University of Manchester, UK;3. Ministry of Finance, Government of India, India;4. Department of Finance, College of Business Administration, University of Central Florida, Orlando, FL 32816-1400, USA |
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| Abstract: | We examine the risk-return characteristics of a rolling portfolio investment strategy where more than 6000 Nasdaq initial public offering (IPO) stocks are bought and held for up to 5 years. The average long-run portfolio return is low, but IPO stocks appear as “longshots”, as 5-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 characteristic-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. |
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