Effects of underwriters, venture capital and industry on long‐term initial public offering performance

Purpose – The purpose of this paper is to examine whether the choice of underwriters, venture capital (VC) support, industry and their interactions have any impact on the long‐term performance of initial public offerings (IPOs). Design/methodology/approach – Using standard event study methodology, 12 months of abnormal monthly returns for 1,772 IPOs are obtained. ANOVA and regression analyses are performed on both abnormal returns (ARs) and cumulative ARs to investigate the effect of underwriter choice, VC support and industry and their interactions on the long‐term performance of IPOs. Findings – Under a multi‐factor framework, only significant underwriter and VC effects are found. Short‐term price momentum and long‐term price reversal pattern is most pronounced for IPOs that are underwritten by leading investment banks and backed by venture capitalists. The beginning of price reversal coincides with the expiration of IPO lockup period. Although by the end of the first year, IPOs on average underperform the market, investors can earn above market returns by investing in IPOs that are underwritten by leading investment banks and backed by venture capitalists, and divest before the expiration of the lockup period. Research limitations/implications – The results are limited by the accuracy of the models used in measuring ARs. Practical implications – The results seem to suggest that a profitable investment strategy may be implemented with regard to IPOs. Originality/value – The paper analyzes the various effects and their interactions on the long‐term performance of IPOs.