MYTH OR REALITY - THE LONG-RUN UNDERPERFORMANCE OF INITIAL PUBLIC OFFERINGS - EVIDENCE FROM VENTURE AND NONVENTURE CAPITAL-BACKED COMPANIES

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 ven ture-backed IPOs outperform nonventure-backed IPOs using equal weighte d returns. Value weighting significantly reduces performance differenc es and substantially reduces underperformance for nonventure-backed IP Os. In tests using several comparable benchmarks and the Fama-French ( 1993) three factor asset pricing model, venture-backed companies do no t significantly underperform, while the smallest nonventure-backed fir ms do. Underperformance, however, is not an IPO effect. Similar size a nd book-to-market firms that have not issued equity perform as poorly as IPOs.