Initial Public Offerings: An Asset Allocation Perspective
45 Pages Posted: 29 Sep 2004
Date Written: March 7, 2005
Abstract
We examine whether investors can improve their investment opportunity sets by adding an IPO portfolio to a set of benchmark portfolios sorted by firm size and book-to-market ratio. Using U.S. IPOs from 1980-2002, we find that adding a value-weighted IPO portfolio does lead to a statistically and economically significant enlargement of the investment opportunity set for investors relative to investing solely in a set of benchmark portfolios. This is true even though the portfolio of IPOs from the prior 3 years is only 4% of the market value of non-IPO stocks, on average. Furthermore, IPOs associated with prestigious lead underwriters are the main source of this augmentation of the mean-variance investment opportunity set.
Keywords: Initial Public Offerings, Mean-Variance Spanning Test, Investment Opportunity Set
JEL Classification: G00, G11, G30
Suggested Citation: Suggested Citation
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