The diversification effects of initial public offerings

Hsuan Chi Chen, Keng Yu Ho, Yu Jen Hsiao, Cheng Huan Wu

Research output: Contribution to journalArticle

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.

Original languageEnglish
Pages (from-to)171-205
Number of pages35
JournalJournal of Business Finance and Accounting
Volume37
Issue number1-2
DOIs
Publication statusPublished - Jan 1 2010
Externally publishedYes

Fingerprint

Diversification
Initial public offerings
Investors
Benchmark portfolio
Investment opportunity set
Diversification benefits
Book-to-market ratio
Mean-variance
Exchange traded funds
Augmentation
Underwriters
Sharpe ratio
Portfolio diversification
Firm size
Enlargement
Investing

Keywords

  • Initial public offerings
  • Investment opportunity set
  • Mean-variance spanning test

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting (miscellaneous)
  • Finance

Cite this

The diversification effects of initial public offerings. / Chen, Hsuan Chi; Ho, Keng Yu; Hsiao, Yu Jen; Wu, Cheng Huan.

In: Journal of Business Finance and Accounting, Vol. 37, No. 1-2, 01.01.2010, p. 171-205.

Research output: Contribution to journalArticle

Chen, Hsuan Chi ; Ho, Keng Yu ; Hsiao, Yu Jen ; Wu, Cheng Huan. / The diversification effects of initial public offerings. In: Journal of Business Finance and Accounting. 2010 ; Vol. 37, No. 1-2. pp. 171-205.
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