The Short- And Long-run Performance of Private Equity-backed IPOs: An Empirical Study of the U.S. Stock Market

Abstract

This master thesis seeks to investigate whether private equity (PE)-backed initial public offerings (IPOs) exhibit superior short- and long-run performance to non-backed IPOs on the U.S. American stock market from 2009 to 2022. The study investigates a sample of 472 IPOs, gathered exclusively from the two largest U.S. stock exchanges, the New York Stock Exchange (NYSE) and NASDAQ. Additionally, the analysis seeks to determine if IPOs tend to underperform in the long run while also assessing the influence of firm- and PE-specific determinants on the aftermarket performance. Stock returns are conducted weekly over three investment horizons (six months, one year, and three years) during three distinct cohorts: 2009-2014, 2014- 2019, and 2019-2022. The study utilizes an event-time approach, measuring performance through equal-weighted Cumulative Abnormal Return (CAR) and Buy-and-Hold Abnormal Return calculations benchmarked against the S&P 500 Index. The findings indicate that an investment in all IPOs over the three-year horizon yielded a negative CAR and BHAR for Cohorts 1 and 2, which aligns with the typical long-run underperformance of IPOs evident in the existing literature. However, PE-backed IPOs exhibited less negative abnormal returns in line with previous studies. Notably, PE-backed IPOs demonstrated a higher CAR than non-backed IPOs across all cohorts, marked by statistical significance. Similarly, PE-backed IPOs showed a higher BHAR than non-backed IPOs, particularly evident and statistically significant over the one-year horizon across all cohorts. This outperformance trend is emphasized by positive statistical significance for PE-backed IPOs in the OLS regression over multiple investment horizons, with the one-year horizon showing consistent significance across all cohorts. The findings align with the literature highlighting the benefits of PE-backing, such as superior operational monitoring and management expertise. To further support the analysis, a multivariate regression was conducted to identify the influence of firm- and PE-specific determinants on the aftermarket performance, demonstrating significant results across all cohorts. The regression output reveals a positive correlation between post-IPO performance and firm age, market capitalization, Sharpe ratio, and EBITDA margin, while longer PE holding periods and higher asset leverage exhibit negative impacts on BHAR. Thus, this study suggests that equity investors can benefit from investing in PE-backed IPOs over the one-year investment horizon.