Hostname: page-component-78c5997874-4rdpn Total loading time: 0 Render date: 2024-11-04T19:08:20.300Z Has data issue: false hasContentIssue false
  • English
  • Français

Institutional versus Individual Investment in IPOs: The Importance of Firm Fundamentals

Published online by Cambridge University Press:  01 June 2009

Laura Casares Field  and
Michelle Lowry
Laura Casares Field
Affiliation:
Smeal College of Business, Pennsylvania State University, Business Administration Building, University Park, PA 16802. [email protected]
Michelle Lowry
Affiliation:
Smeal College of Business, Pennsylvania State University, Business Administration Building, University Park, PA 16802. [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

Consistent with institutions having an advantage over individuals, we find that newly public firms with the highest levels of institutional investment significantly outperform those with the lowest levels. While prior literature has attributed much of institutions’ higher returns around various corporate events to private information, we find that much of the difference simply reflects better interpretation of readily available public information. Individuals disproportionately invest in the types of firms that earn significantly lower abnormal returns over the long run. Individuals either disregard or misinterpret the relevance of readily available public information, and as a result, they bear the brunt of IPO underperformance.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 3 , June 2009 , pp. 489 - 516
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aggarwal, R. “Stabilization Activities by Underwriters after Initial Public Offerings.” Journal of Finance, 55 (2000), 1075–1103.Google Scholar
Aggarwal, R. “Allocation of Initial Public Offerings and Flipping Activity.” Journal of Financial Economics, 68 (2003), 111–135.CrossRefGoogle Scholar
Badrinath, S.; Kale, J.; and Noe, T.. “Of Shepherds, Sheep, and the Cross-Autocorrelations in Equity Returns.” Review of Financial Studies, 8 (1995), 401–430.Google Scholar
Barber, B., and Odean, T.. “All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors.” Review of Financial Studies, 21 (2008), 785–818.CrossRefGoogle Scholar
Boehmer, B.; Boehmer, E.; and Fishe, R..“Do Institutions Receive Favorable Allocations in IPOs with Better Long-Run Returns?” Journal of Financial and Quantitative Analysis, 41 (2006), 809–828.Google Scholar
Brav, A.; Geczy, C.; and Gompers, P.. “Is the Abnormal Return Following Equity Issuances Anomalous?” Journal of Financial Economics, 56 (2000), 209–249.Google Scholar
Brav, A., and Gompers, P.. “Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies.” Journal of Finance, 52 (1997), 1791–1821.Google Scholar
Bushee, B. “The Influence of Institutional Investors on Myopic R&D Investment Behavior.” Accounting Review, 73 (1998), 305–333.Google Scholar
Bushee, B. “Do Institutional Investors Prefer Near-Term Earnings over Long-Run Value?” Contemporary Accounting Research, 18 (2001), 207–246.Google Scholar
Carter, R.; Dark, R.; and Singh, A..“Underwriter Reputation, Initial Returns and the Long-Run Performance of IPO Stocks.” Journal of Finance, 53 (1998), 285–311.CrossRefGoogle Scholar
Carter, R., and Manaster, S.. “Initial Public Offerings and Underwriter Reputation.” Journal of Finance, 45 (1990), 1045–1068.CrossRefGoogle Scholar
Chemmanur, T.; He, S.; and Hu, G.. “The Role of Institutional Investors in Seasoned Equity Offerings.” Working Paper, Boston College (2005).Google Scholar
Chemmanur, T., and Hu, G.. “Institutional Trading, Allocation Sales, and Private Information in IPOs.” Working Paper, Boston College (2007).Google Scholar
Chen, X.; Harford, J.; and Li, K.. “Monitoring: Which Institutions Matter?” Journal of Financial Economics, 86 (2007), 279–305.Google Scholar
Cohen, R.; Gompers, P.; and Vuolteenaho, T.. “Who Underreacts to Cash-Flow News? Evidence from Trading between Individuals and Institutions.” Journal of Financial Economics, 66 (2002), 409–462.Google Scholar
Cook, D.; Jarrell, S.; and Kieschnick, R.. “Investor Sentiment and IPO Cycles.” Working Paper, University of Texas at Dallas (2003).Google Scholar
Cook, D.; Kieschnick, R.; and Van Ness, R.. “On the Marketing of IPOs.” Journal of Financial Economics, 82 (2006), 35–61.CrossRefGoogle Scholar
Cornelli, F.; Goldreich, D.; and Ljungqvist, A.. “Investor Sentiment and Pre-IPO Markets.” Journal of Finance, 61 (2006), 1187–1214.Google Scholar
D'Avolio, G. “The Market for Borrowing Stock.” Journal of Financial Economics, 66 (2002), 271–306.Google Scholar
Del Guercio, D., and Hawkins, J.. “The Motivation and Impact of Pension Fund Activism.” Journal of Financial Economics, 52 (1999), 293–340.Google Scholar
Derrien, F. “IPO Pricing in ‘Hot’ Market Conditions: Who Leaves Money on the Table?” Journal of Finance, 60 (2005), 487–521.CrossRefGoogle Scholar
Dor, A. “The Performance of Initial Public Offerings and the Cross Section of Institutional Ownership.” Working Paper, Northwestern University (2004).Google Scholar
Edwards, A., and Hanley, K.. “Short Selling and Failures to Deliver in Initial Public Offerings.” Working Paper, Securities and Exchange Commission (2008).Google Scholar
Fama, E. “Market Efficiency, Long-Term Returns, and Behavioral Finance.” Journal of Financial Economics, 49 (1998), 283–306.Google Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Field, L. “Is Institutional Investment in Initial Public Offerings Related to the Long-Run Performance of These Firms?” Working Paper, Penn State University (1997).Google Scholar
Field, L., and Hanka, G.. “The Expiration of IPO Share Lockups.” Journal of Finance, 56 (2001), 471–500.CrossRefGoogle Scholar
Field, L., and Karpoff, J.. “Takeover Defenses of IPO Firms.” Journal of Finance, 57 (2002), 1857–1889.Google Scholar
Geczy, C.; Musto, D.; and Reed, A.. “Stocks are Special Too: An Analysis of the Equity Lending Market.” Journal of Financial Economics, 66 (2002), 241–269.Google Scholar
Gompers, P., and Metrick, A.. “Institutional Investors and Equity Prices.” Quarterly Journal of Economics, 116 (2001), 229–259.CrossRefGoogle Scholar
Grossman, S., and Hart, O.. “Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation.” Bell Journal of Economics, 11 (1980), 42–64.CrossRefGoogle Scholar
Hanley, K. “Underpricing of Initial Public Offerings and the Partial Adjustment Phenomenon.” Journal of Financial Economics, 34 (1993), 177–198.Google Scholar
Hanley, K.; Lee, C.; and Seguin, P.. “The Marketing of Closed-End Fund IPOs: Evidence from Transactions Data.” Journal of Financial Intermediation, 5 (1996), 127–159.Google Scholar
Hanley, K., and Wilhelm, W.. “Evidence on the Strategic Allocation of Initial Public Offerings.” Journal of Financial Economics, 37 (1995), 239–257.Google Scholar
Huddart, S. “The Effect of a Large Shareholder on Corporate Value.” Management Science, 39 (1993), 1407–1421.CrossRefGoogle Scholar
Krigman, L.; Shaw, W.; and Womack, K.. “The Persistence of IPO Mispricing and the Predictive Power of Flipping.” Journal of Finance, 54 (1999), 1015–1044.Google Scholar
Ljungqvist, A.; Nanda, V.; and Singh, R.. “Hot Markets, Investor Sentiment, and IPO Pricing.” Journal of Business, 79 (2006), 1667–1702.Google Scholar
Ljungqvist, A., and Wilhelm, W.. “IPO Allocations: Discriminatory or Discretionary?” Journal of Financial Economics, 65 (2002), 167–201.CrossRefGoogle Scholar
Ljungqvist, A., and Wilhelm, W.. “IPO Pricing in the Dot-Com Bubble.” Journal of Finance, 58 (2003), 723–752.Google Scholar
Logue, D.; Rogalski, R.; Seward, J.; and Foster-Johnson, L.. “What is Special about the Roles of Underwriter Reputation and Market Activities in Initial Public Offerings?” Journal of Business, 75 (2002), 213–243.Google Scholar
Loughran, T., and Ritter, J.. “Why Has IPO Underpricing Changed over Time?” Financial Management, 33 (2004), 5–37.Google Scholar
Lowry, M. “Why Does IPO Volume Fluctuate So Much?” Journal of Financial Economics, 67 (2003), 3–40.CrossRefGoogle Scholar
Michaely, R., and Shaw, W.. “The Pricing of Initial Public Offerings: Tests of Adverse-Selection and Signaling Theories.” Review of Financial Studies, 7 (1994), 279–319.Google Scholar
Nagel, S. “Short Sales, Institutional Investors, and the Cross-Section of Stock Returns.” Journal of Financial Economics, 78 (2005), 277–309.CrossRefGoogle Scholar
Odean, T. “Are Investors Reluctant to Realize Their Losses?” Journal of Finance, 53 (1998), 1775–1798.Google Scholar
Papke, L., and Wooldridge, J.. “Econometric Methods for Fractional Response Variables with an Application to 401(k) Plan Participation Rates.” Journal of Applied Econometrics, 11 (1996), 619–633.3.0.CO;2-1>CrossRefGoogle Scholar
Parrino, R.; Sias, R.; and Starks, L.. “Voting with Their Feet: Institutional Ownership Changes around Forced CEO Turnover.” Journal of Financial Economics, 68 (2003), 3–46.CrossRefGoogle Scholar
Purnanandam, A., and Swaminathan, B.. “Are IPOs Really Underpriced?” Review of Financial Studies, 17 (2004), 811–848.CrossRefGoogle Scholar
Ritter, J. “The Long-Run Performance of Initial Public Offerings.” Journal of Finance, 46 (1991), 3–27.Google Scholar
Shleifer, A., and Vishny, R.. “Large Shareholders and Corporate Control.” Journal of Political Economy, 94 (1986), 461–478.Google Scholar