Relative Risk of IPO versus Non-IPO Firms

Recent theoretical studies (Benninga, Hermantel, and Sarig, 2005; Zhang, 2005) argue that IPO firms have less risk than non-IPO firms and thus have lower long-run returns. If this is true, IPO firms must outperform more risky firms with some frequency, particularly in the worst states of the world (Lakonishok, Shleifer, and Vishny, 1994). This study finds that IPOs perform worse than their matching non-IPO firms in the worst times using a non-parametric approach to avoid the bad-model problem of risk measure. The findings support the traditional theory that IPO firms on average have more risk than non-IPO firms.