Nonrandom Survival and Long-Run Performance of IPO Firms

Abstract

I find IPO firm survival is not random: better-performing IPOs are more likely to survive. Some unlucky IPO firms are delisted early after experiencing negative idiosyncratic shocks. These IPO firms’ average observed performance understates their true performance, creating the reverse survivorship bias. Because of non-random survival, seasoned firms have greater expected returns than IPO firms, creating the survivorship bias. Buy-and-hold abnormal returns relative to matched seasoned firms underestimate IPO firm performance because of the two biases. Alpha of the calendar time portfolio of IPO firms, unaffected by the biases, offers an unbiased measure of the average IPO firm alpha.