The long‐run performance of UK IPOs: can it be predicted?

The aim of the paper is to study the long‐run under‐performance of UK initial public offerings (IPOs) by relating it to the pre‐IPO financial performance of the firm as well as the managerial decisions taken before the IPO.

The three‐year share returns of UK IPOs is studied using various methodologies such as buy and hold returns, cumulative abnormal returns and Fama and French three‐factor returns.

It was found that the percentage of equity issued and the degree of multinationality of a firm are the key predictors of its performance after the IPO. It is also found that small firms behave differently from large firms and suffer from worse long‐run performance than large firms.

There is a great need for future research to focus on ownership structure and long‐run returns. Further, a focus on the level of debt and venture capital financing in the pre‐IPO period may also uncover important relationships with the long‐run performance of a firm.

The results obtained from this study provide important information for the prospective long term investors in new issues. While pre‐IPO performance of a firm cannot predict the post‐IPO performance with certainty, nevertheless the results of this study suggest that long‐term investors should show caution while deciding on long term investment in IPO firms.

The paper explains the post‐IPO underperformance of firms by relating it to the pre‐IPO managerial decisions made in the firm. It also documents the role of multinationality in explaining long run underperformance.