Hostname: page-component-65f69f4695-v4vvv Total loading time: 0 Render date: 2025-06-26T08:21:18.337Z Has data issue: false hasContentIssue false
  • English
  • Français

Outside Insiders: Does Access to Information Prior to an IPO Generate a Trading Advantage After the IPO?

Published online by Cambridge University Press:  25 October 2018

Umit Ozmel ,
Timothy E. Trombley  and
M. Deniz Yavuz
Get access Rights & Permissions [Opens in a new window]

Abstract

We investigate whether access to information prior to an initial public offering (IPO) generates a trading advantage after the IPO. We find that limited partners (LPs) of lead venture capital funds obtain high returns when they invest in newly listed stocks backed by their funds. These returns are not explained by LPs’ differing stock-picking abilities, and they are higher when LPs’ information advantage over the public is higher. LPs are more likely to invest if they have an information advantage, and access to information eliminates the familiarity bias that they display otherwise.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 1 , February 2019 , pp. 303 - 334
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

Footnotes

1

We are grateful for comments from an anonymous referee, Lauren Cohen, Jennifer Conrad, Michael Ewens, Mara Faccio, Oleg Gredil, Huseyin Gulen, Jarrad Harford (the editor), Jiekun Huang, Byoung-Hyoun Hwang, Zoran Ivković, Laura Lindsey, John McConnell, Raj Nahata, Manju Puri, Moon Song, Rene Stulz, Sunil Wahal, and seminar participants at the 2016 Western Finance Association Meetings, the 2016 York University CFA Institute–Finance Research Letters–Journal of International Financial Markets, Institutions, and Money (CFA-FRL-JIFMIM) Financial Markets Conference, the 2016 Financial Management Association Annual Meeting, the 2015 Michigan State University Federal Credit Union Conference, Miami University, Purdue University, San Diego State University, and the University of Cincinnati.

References

Admati, A. R., and Pfleiderer, P.. “Robust Financial Contracting and the Role of Venture Capitalists.” Journal of Finance, 49 (1994), 371–402.Google Scholar
Agrawal, A., and Cooper, T.. “Insider Trading before Accounting Scandals.” Journal of Corporate Finance, 34 (2015), 169–190.Google Scholar
Ahern, K. R.“Information Networks: Evidence from Illegal Insider Trading Tips.” Journal of Financial Economics, 125 (2017), 26–47.Google Scholar
Aragon, G. O., and Martin, J. S.. “A Unique View of Hedge Fund Derivatives Usage: Safeguard or Speculation?” Journal of Financial Economics, 105 (2012), 436–456.Google Scholar
Baker, M., and Wurgler, J.. “Market Timing and Capital Structure.” Journal of Finance, 57 (2002), 1–32.Google Scholar
Baum, J. A. C., and Silverman, B. S.. “Picking Winners or Building Them? Alliance, Intellectual, and Human Capital as Selection Criteria in Venture Financing and Performance of Biotechnology Startups.” Journal of Business Venturing, 19 (2004), 411–436.Google Scholar
Bettis, C.; Vickrey, D.; and Vickrey, D. W.. “Mimickers of Corporate Insiders Who Make Large-Volume Trades.” Financial Analysts Journal, 53 (1997), 57–66.Google Scholar
Cao, H. H.; Han, B.; Hirshleifer, D.; and Zhang, H. H.. “Fear of the Unknown: Familiarity and Economic Decisions.” Review of Finance, 15 (2011), 173–206.Google Scholar
Carhart, M. M.“On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.Google Scholar
Carter, R., and Manaster, S.. “Initial Public Offerings and Underwriter Reputation.” Journal of Finance, 45 (1990), 1045–1067.Google Scholar
Chari, V. V.; Jagannathan, R.; and Ofer, A. R.. “Seasonalities in Security Returns: The Case of Earnings Announcements.” Journal of Financial Economics, 21 (1988), 101–121.Google Scholar
Chemmanur, T. J.; Hu, G.; and Huang, J.. “The Role of Institutional Investors in Initial Public Offerings.” Review of Financial Studies, 23 (2010), 4496–4540.Google Scholar
Chiang, Y.-M.; Qian, Y.; and Sherman, A. E.. “Endogenous Entry and Partial Adjustment in IPO Auctions: Are Institutional Investors Better Informed?” Review of Financial Studies, 23 (2010), 1200–1230.Google Scholar
Cliff, M. T., and Denis, D. J.. “Do Initial Public Offering Firms Purchase Analyst Coverage with Underpricing?” Journal of Finance, 59 (2004), 2871–2901.Google Scholar
Cohen, L.; Frazzini, A.; and Malloy, C.. “The Small World of Investing: Board Connections and Mutual Fund Returns.” Journal of Political Economy, 116 (2008), 951–979.Google Scholar
Cohen, L.; Frazzini, A.; and Malloy, C.. “Sell-Side School Ties.” Journal of Finance, 65 (2010), 1409–1437.Google Scholar
Cornelli, F.; Goldreich, D.; and Ljungqvist, A.. “Investor Sentiment and Pre-IPO Markets.” Journal of Finance, 61 (2006), 1187–1216.Google Scholar
Corwin, S. A., and Harris, J. H.. “The Initial Listing Decisions of Firms That Go Public.” Financial Management, (2001), 35–55.Google Scholar
Coval, J. D., and Moskowitz, T. J.. “The Geography of Investment: Informed Trading and Asset Prices.” Journal of Political Economy, 109 (2001), 811–841.Google Scholar
Duan, Y.; Hotchkiss, E. S.; and Jiao, Y.. “Business Ties and Information Advantage: Evidence from Mutual Fund Trading.” Contemporary Accounting Research, 35 (2018), 866–897.Google Scholar
Edelen, R. M., and Kadlec, G. B.. “Issuer Surplus and the Partial Adjustment of IPO Prices to Public Information.” Journal of Financial Economics, 77 (2005), 347–373.Google Scholar
Faccio, M., and Hsu, S. H. C.. “Politically Connected Private Equity and Employment.” Journal of Finance, 72 (2017), 539–574.Google Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stock and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Field, L. C., and Lowry, M.. “Institutional versus Individual Investment in IPOs: The Importance of Firm Fundamentals.” Journal of Financial and Quantitative Analysis, 44 (2009), 489–516.Google Scholar
Gompers, P., and Lerner, J.. “Venture Capital Distributions: Short-Run and Long-Run Reactions.” Journal of Finance, 53 (1998), 2161–2183.Google Scholar
Gorman, M., and Sahlman, W. A.. “What Do Venture Capitalists Do?” Journal of Business Venturing, 4 (1989), 231–248.Google Scholar
Heckman, J. J.“Sample Selection Bias as a Specification Error.” Econometrica, (1979), 153–161.Google Scholar
Hellmann, T., and Puri, M.. “The Interaction between Product Market and Financing Strategy: The Role of Venture Capital.” Review of Financial Studies, 13 (2000), 959–984.Google Scholar
Hellmann, T., and Puri, M.. “Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence.” Journal of Finance, 57 (2002), 169–197.Google Scholar
Henning, P. J.“Court Strikes on Insider Trading, and Congress Lobs Back.” New York Times (Mar. 17, 2015),  available at https://www.nytimes.com/2015/03/17/business/dealbook/court-strikes-on-insider-trading-and-congress-lobs-back.html.Google Scholar
Huberman, G.“Familiarity Breeds Investment.” Review of Financial Studies, 14 (2001), 659–680.Google Scholar
Ivković, Z., and Weisbenner, S.. “Local Does as Local Is: Information Content of the Geography of Individual Investors’ Common Stock Investments.” Journal of Finance, 60 (2005), 267–306.Google Scholar
Ivković, Z., and Weisbenner, S.. “Information Diffusion Effects in Individual Investors’ Common Stock Purchases: Covet Thy Neighbors’ Investment Choices.” Review of Financial Studies, 20 (2007), 1327–1357.Google Scholar
Jeng, L. A.; Metrick, A.; and Zeckhauser, R.. “Estimating the Returns to Insider Trading: A Performance-Evaluation Perspective.” Review of Economics and Statistics, 85 (2003), 453–471.Google Scholar
Krishnan, C. N. V.; Ivanov, V. I.; Masulis, R. W.; and Singh, A. K.. “Venture Capital Reputation, Post-IPO Performance, and Corporate Governance.” Journal of Financial and Quantitative Analysis, 46 (2011), 1295–1333.Google Scholar
Lakonishok, J., and Lee, I.. “Are Insider Trades Informative?” Review of Financial Studies, 14 (2001), 79–11.Google Scholar
Lee, P. M., and Wahal, S.. “Grandstanding, Certification and the Underpricing of Venture Capital Backed IPOs.” Journal of Financial Economics, 73 (2004), 375–407.Google Scholar
Lerner, J.; Schoar, A.; and Wongsunwai, W.. “Smart Institutions, Foolish Choices: The Limited Partner Performance Puzzle.” Journal of Finance, 62 (2007), 731–764.Google Scholar
Levine, M.“Another Politician Wants to Ban Insider Trading.” Bloomberg View (Apr. 1, 2015).Google Scholar
Lindsey, L.“Blurring Firm Boundaries: The Role of Venture Capital in Strategic Alliances.” Journal of Finance, 63 (2008), 1137–1168.Google Scholar
Ljungqvist, A.; Nanda, V.; and Singh, R.. “Hot Markets, Investor Sentiment, and IPO Pricing.” Journal of Business, 79 (2006), 1667–1702.Google Scholar
Loughran, T., and Ritter, J. R.. “Why Has IPO Underpricing Changed over Time?” Financial Management, 33 (2004), 5–37.Google Scholar
Loughran, T., and Schultz, P.. “Liquidity: Urban versus Rural Firms.” Journal of Financial Economics, 78 (2005), 341–374.Google Scholar
Marquez, R.; Nanda, V.; and Yavuz, M. D.. “Private Equity Fund Returns and Performance Persistence.” Review of Finance, 19 (2015), 1783–1823.Google Scholar
Massa, M., and Rehman, Z.. “Information Flows within Financial Conglomerates: Evidence from the Banks–Mutual Funds Relation.” Journal of Financial Economics, 89 (2008), 288–306.Google Scholar
Massa, M., and Simonov, A.. “Hedging, Familiarity and Portfolio Choice.” Review of Financial Studies, 19 (2006), 633–685.Google Scholar
Megginson, W. L., and Weiss, K. A.. “Venture Capitalist Certification in Initial Public Offerings.” Journal of Finance, 46 (1991), 879–903.Google Scholar
Merton, R. C.“A Simple Model of Capital Market Equilibrium with Incomplete Information.” Journal of Finance, 42 (1987), 483–510.Google Scholar
Metrick, A., and Yasuda, A.. “The Economics of Private Equity Funds.” Review of Financial Studies, 23 (2010), 2303–2341.Google Scholar
Nahata, R.“Venture Capital Reputation and Investment Performance.” Journal of Financial Economics, 90 (2008), 127–151.Google Scholar
Nanda, V., and Yun, Y.. “Reputation and Financial Intermediation: An Empirical Investigation of the Impact of IPO Mispricing on Underwriter Market Value.” Journal of Financial Intermediation, 6 (1997), 39–63.Google Scholar
Ozmel, U.; Reuer, J. J.; and Gulati, R.. “Signals across Multiple Networks: How Venture Capital and Alliance Networks Affect Interorganizational Collaboration.” Academy of Management Journal, 56 (2013), 852–866.Google Scholar
Ozmel, U.; Robinson, D. T.; and Stuart, T. E.. “Strategic Alliances, Venture Capital, and Exit Decisions in Early Stage High-Tech Firms.” Journal of Financial Economics, 107 (2013), 655–670.Google Scholar
Pástor, L., and Veronesi, P.. “Rational IPO Waves.” Journal of Finance, 60 (2005), 1713–1757.Google Scholar
Pool, V. K.; Stoffman, N.; and Yonker, S. E.. “No Place Like Home: Familiarity in Mutual Fund Manager Portfolio Choice.” Review of Financial Studies, 25 (2012), 2563–2599.Google Scholar
Pukthuanthong-Le, K., and Varaiya, N.. “IPO Pricing, Block Sales, and Long-Term Performance.” Financial Review, 42 (2007), 319–348.Google Scholar
Ritter, J. R.“Initial Public Offerings: VC–Backed IPO Statistics through 2012.” Working Paper, University of Florida (2013).Google Scholar
Seasholes, M. S., and Zhu, N.. “Individual Investors and Local Bias.” Journal of Finance, 65 (2010), 1987–2010.Google Scholar
Sensoy, B. A.; Wang, Y.; and Weisbach, M. S.. “Limited Partner Performance and the Maturing of the Private Equity Industry.” Journal of Financial Economics, 112 (2014), 320–343.Google Scholar
Seyhun, H. N.“Insiders’ Profits, Costs of Trading, and Market Efficiency.” Journal of Financial Economics, 16 (1986), 189–212.Google Scholar
Sørensen, M.“How Smart Is Smart Money? A Two-Sided Matching Model of Venture Capital.” Journal of Finance, 62 (2007), 2725–2762.Google Scholar
Stock, J. H., and Yogo, M.. “Testing for Weak Instruments in Linear IV Regression.” In Identification and Inference for Econometric Models: Essays in Honor of Thomas Rothenberg, Andrews, D. W. K. and Stock, J. H., eds. New York, NY: Cambridge University Press (2005).Google Scholar