Firms’ Age, Size, and IPO Performance across Sectors


Does a firms age and size matter in the world of Initial Public Offerings?


Smader Siev, a luminary from Ono Academic College and Mahmoud Qadan from the the University of Haifa, have explored the dynamic landscape of Initial Public Offerings, and demonstrated how age and size play pivotal roles in the IPO world.


Read the original research:



Image Source: Adobe Stock Images / Voy_ager



Welcome, curious minds, to ResearchPod, where we unearth the latest studies and unravel the mysteries that shape our understanding of the world. Today, we delve into a groundbreaking study by Smader Siev, a luminary from Ono Academic College and Mahmoud Qadan

from the the University of Haifa, who has explored the dynamic landscape of Initial Public Offerings, and demonstrated how age and size play pivotal roles in the IPO world.


We uncover the hidden threads that connect firms, their histories, and market performance; this episode promises to shed new light on the strategies behind going public and the impact it has on a company’s valuation.


Previous findings

Now, you’ve probably come across the term IPO, but what exactly is it? IPO itself stands for Initial Public Offering, marking the transition of a privately-held company into the realm of public markets – seeking additional investment. Siev and Qadan findings suggest that when a company undergoes an IPO, investors experience a significant negative abnormal return in the 3 years post IPO. This trend has been witnessed across various nations including the UK, France, and Australia. Yet, it’s worth noting that there’s contradictory evidence from countries like South Korea, China, and Greece, showcasing an overperformance of IPOs. So, where does the truth lie? Siev and Qadan posits that the size, age and sector of a firm can serve as indicators of its future performance.


In the study, Siev and Qadan use a substantial dataset featuring 1611 firms, categorized into 11 economic sectors spanning from 2009 to 2019, all in an effort to reexamine previous findings regarding the underperformance of US IPOs. The second phase of the study involved organizing firms into portfolios based on their size, age and sector and then tracking their performance in the three years post IPO



Age variation finding & ipo advantages

One fascinating finding is the considerable variability in the average age of firms that opt for an IPO across sectors. For instance, healthcare companies tend to go public at the average age of 10 years, technology firms at 13 years, whereas basic materials firms tend to do so at 30 years and industrial firms at the age of 34 years. It could be argued that firms in healthcare and technology may need to go public earlier to secure financial resources. From a strategic standpoint, going public can offer a competitive edge, making it the first mover in a market. Moreover, it elevates investor recognition, a firm’s visibility, reputation, and credibility, ultimately reducing a firm’s cost of equity and augmenting its overall value. But that’s not the only advantage. Launching an IPO can also furnish firms with financial flexibility and bolster their bargaining power with financial creditors. But how, you might wonder? Well, it positions the firm as an attractive prospect for securing additional capital to fuel investments, reducing reliance on alternative sources like debt. Other studies emphasize that an IPO is pivotal in promoting superior corporate governance and heightened transparency, as companies commit to meeting the disclosure and regulatory standards of financial exchanges


Main results: CAAR by firm size

Now, onto the crux of the study: Findings from the research unveil that firms typically lag behind the standard market index after an IPO – especially smaller ones when compared to their larger counterparts. Using the S&P index as a benchmark, For small firms, a year post IPO shows Cumulative average Abnormal Return (CAAR) of -42%, plummeting to a staggering -114% three years later. Conversely, large firms exhibit a CAAR of just -15% in the first year and -26% after three years. This starkly highlights a 28% discrepancy between the two categories after one year, escalating to a significant 88% difference after three years. The superior long term performance of big firms is evident also within sectors.  A possible explanation is that firms with smaller market values are perceived as having a less likelihood of survival, which leads to their share underperformance in the years following the IPO


Derivative strategy

So, what’s the significance of all this? the observation that small firms tend to underperform in comparison to their larger counterparts, unveils an intriguing trading strategy: one might consider a tactic that involves investing in a portfolio of large-sized IPOs while shorting a portfolio of small-sized IPOs. The first 100 trading days post-IPO saw this trading rule yield approximately 14% return. Remarkably, after 250 days, the strategy boasted a 28% return, and after 550 days, an impressive 62% return. This outcome solidifies the notion that the commonly known phenomena of long-term underperformance of IPOs in the US should not be seen as a one-piece, but rather that the size of the company has a substantial effect on its performance, for small sized firms’ investors’ attention diminishes at the post IPO years as they seek their next speculative opportunity.



Why to issue?

Now, as we tread deeper into this discussion, a pertinent question arises: if going public through an IPO can potentially negatively impact a firm’s value, what’s the incentive for firms to take this leap? Previous research has pointed to a compelling reason: companies often opt for an IPO to increase their prominence, to attract investors’ attention and as a result to increase the likelihood of being a candidate for acquisition or merger.  For small firms raising capital is critical to survival and often can be a matter of make or break.


From a regulatory perspective, fostering an environment where small companies can go public is integral to fostering economic growth within a country. It stimulates job creation and provides smaller enterprises with the vital capital they need for business expansion.


Size age correlation


Now, let’s revisit the heart of the study.


The study uncovered a direct correlation between market value and a firm’s age, with a gradual increase observed across firms’ market value quintiles, where market value is derived from the pre-IPO number of shares multiplied by the offer price. ‘Quintiles’ is a statistical term used to divide a set of data into five equal parts, commonly used to help understand the spread and distribution of data. For instance, in regards to the study, in quintile one, the average age of a firm stands at 10 years, whereas in quintile five, it rises to an impressive 28 years. This highlights that older firms have more time to establish and expand their businesses, which is evidently reflected in their value. Notably, larger firms have the capacity to raise more capital. In quintile one, they might secure about 71 million US dollars, whereas in quintile five, that figure skyrockets to a staggering 834 million US dollars.


The positive correlation between a firm’s size and age, led to the examination of the CAAR within three distinct age-based portfolios.


CAAR by age

For instance, the A1 portfolio comprised young firms, aged between one to six years. Moving up the maturity ladder, Portfolio A2 included more established firms, aged seven to thirteen years, while Portfolio A3 encompassed even more mature firms, aged fourteen years and beyond. The CAAR results were scrutinized across various time frames and, it was evident that, overall, older firms exhibited superior performance compared to their younger counterparts, regardless of the time window post IPO.


One might argue that older firms are more likely to yield higher profits, reducing uncertainty about them and have had more time to bolster their value. Indeed, reducing uncertainty about firm future prospects is directly linked to both its age and size, ultimately influencing the amount of funds raised.


. One widely embraced explanation for this phenomenon is that older firms boast a lengthier track record and a wealth of information that’s readily accessible to the public. This increased transparency means that financial analysts and investors are less uncertain about the true value of the firm; older firms have more experienced management that can manage uncertain events better, therefore their underperformance is less severe than these of young firms.



The remarkable research, of Smader Siev’s and Mahmud Qadan makes one thing abundantly clear: the world of Initial Public Offerings is a nuanced landscape, in which post IPO market performance strongly tied to a firm’s age, size, and sector.. The correlation between these factors and the Cumulative Abnormal Average Returns (CAAR) paints a vivid picture of how older, more established firms tend to outperform their younger counterparts.


Furthermore, the connection between a firm’s age and post IPO performance sheds light on the importance of transparency and information accessibility. Older firms, with their extensive track records, offer a level of clarity that often leads to less underperformance , as investors and analysts are better equipped to gauge their true value.


This research not only unravels the intricacies of IPO dynamics but also underscores the critical role that age and size play in a firm’s market performance. It invites us to reevaluate our perspectives on the strategies and motivations behind going public.



In the grand tapestry of financial markets, these findings serve as a beacon, illuminating a path towards better understanding and navigating the world of IPOs. We thank Smadar Siev and Mahmud Qadan for this invaluable contribution, and we’re eager to see how these revelations may shape the future of financial strategies and investment decisions.



That’s all for this episode, thanks for joining us on this enlightening journey through the world of IPOs and academic research. Links to the original research can be found in the show notes for this episode. And, as always, stay subscribed to ResearchPod for more of the latest science!


See you again soon!


Leave a Reply

Your email address will not be published.

Researchpod Let's Talk

Share This

Copy Link to Clipboard