Characterizing the Risk of IPO Long-Run Returns : The Impact of Momentum, Liquidity, Skewness, and Investment

We study 6,686 IPOs spanning the period 1981-2005 and find that the new issues puzzle disappears in a Fama-French three-factor framework. IPOs do not underperform in the aftermarket on a risk-adjusted basis and do not underperform a matched sample of non-issuers. IPO underperformance is concentrated in the 1980's and early 1990's, and IPO's either perform the same as the market, or outperform on a risk-adjusted basis, during 1998-2005. We find that outperformance in the later period is driven by large firms. Factors for momentum, investment, liquidity, and skewness help to explain aftermarket returns, although size and book-to-market tend to proxy for skewness. IPO investors receive smaller expected returns due to negative momentum and investment exposure and in exchange for higher liquidity