Institutional Investors in IPOs Fail to Pick Winners
Institutions are no better at picking future high performing IPO stocks than the average investor, find Meeta Kothare, an assistant professor of finance at the University of Texas at Austin, and Gita Rao, vice president and equity portfolio manager at Colonial Mutual Funds in Boston.
Studying the extent of institutional participation, their investment strategies, and the gains or losses to those strategies, the researchers found that institutional investors are not able to distinguish between good and bad long-term performers. While institutions invest in IPO firms that perform well in the present, there is no evidence that they can pick future winners.
"We find strong evidence that institutional investors in IPOs follow price-based momentum strategies," says Kothare. "This is the practice of buying past winners in the belief that these stocks will continue their superior performance in the future." This practice has clearly become more prevalent. Kothare also says that, in general, there seems to be widespread overoptimism in the IPO market.
The finding suggests that individual mutual fund investors should look at how much their funds invest in IPOs, since those positions may produce poor returns.
Contact: Meeta Kothare, 512/471-6635, [email protected]
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