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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. laurafield@psu.edu
Michelle Lowry
Affiliation:
Smeal College of Business, Pennsylvania State University, Business Administration Building, University Park, PA 16802. mlowry@psu.edu
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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

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