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




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    • Duke University and Harvard University and NBER. Jay Ritter and Charles Lee provided access to data. Victor Hollender and Laura Miller provided research assistance. We thank Chris Géczy, J.B. Heaton, Steve Kaplan, Shmuel Kandel, Marc Lipson, Andrew Metrick, Mark Mitchell, Steve Orpurt, Jay Ritter, Raghu Rajan, Stephen Schurman, Andrei Shleifer, René Stulz, Richard Thaler, Rob Vishny, Luigi Zingales, an anonymous referee, and seminar participants at Boston University, Tel Aviv University, the University of Chicago, the University of Georgia, the University of Rochester, Virginia Tech, the NBER Corporate Finance Summer Institute, and the Financial Decision and Control Workshop at Harvard Business School for helpful comments and suggestions. Financial support was provided by the Center for Research in Security Prices, University of Chicago. Any errors or omissions are our own.


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.