An Investment Strategy Based on the Long-Run Performance of IPOs: Venture-Backed and Non-Venture-Backed Firms

Abstract

This study investigates the evolution and long-run performance of venture-backed and non-venture-backed firms after the initial public offerings (IPOs). We hypothesize that the entrepreneurial ability enables venture-backed firms to keep a good performance in the long run. The results show that firms underperform the market over the five years following the IPOs, with venture-backed firms outperforming non-venture-backed firms. About six years after the IPOs, however, firms still alive outperform the market, with venture-backed firms showing superior performance. We also find that venture-backed firms with glamour performance from year 2 to year 5 after the IPOs tend to maintain good performance from year 6 to year 9. This result supports our hypothesis that the entrepreneurial ability of venture-backed firms lasts for a long period. Putting these results together, we suggest that holding a portfolio consisting of glamour venture-backed stocks listing for about six years is a profitable strategy.