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- Title
The Diversification Effects of Initial Public Offerings.
- Authors
Hsuan-Chi Chen; Keng-Yu Ho; Yu-Jen Hsiao; Cheng-Huan Wu
- Abstract
A firm's stock becomes publicly tradable through an initial public offering (IPO). This study suggests a portfolio diversification perspective to explore IPOs. We examine whether investors can gain diversification benefits by adding an IPO portfolio to a set of benchmark portfolios sorted by firm size and book-to-market ratio. Using US 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. Specifically, the Sharpe ratio of the tangency portfolio increases by 5.50% on average after including IPO stocks. Furthermore, IPOs associated with prestigious lead underwriters are the main source of this augmentation of the mean-variance investment opportunity set. Finally, our study implies that issuing IPO exchange traded funds or similar products can provide diversification gains to investors.
- Subjects
GOING public (Securities); LISTING of securities; TRACKING stock; STOCKS (Finance); BUSINESS enterprises; INVESTORS; CAPITAL market; CORPORATE finance; STOCK funds
- Publication
Journal of Business Finance & Accounting, 2010, Vol 37, Issue 1/2, p171
- ISSN
0306-686X
- Publication type
Article
- DOI
10.1111/j.1468-5957.2009.02177.x