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Frontiers of Entrepreneurship Research 1999: Proceedings of the Eighteenth Annual Frontiers of Entrepreneurship Research Conference (1999)
  • Todd A Finkle, The University of Akron
Principal Topic
Extant research has documented the effect of underpricing in the aftermarket for the general population of initial public offerings (IPOs). This study filled a gap in previous research by answering the following questions related to software IPOs: Does the underperformance phenomena exist in the software industry? Is there a relationship between first-day returns and the long-run performance of software IPOs? Is there a relationship between the underpricing phenomenon and whether a software firm goes public during a hot versus a cold market?
This study utilized the entire population of software IPOs from 1993–1996 (369). Due to a lack of data, 123 firms were dropped (67% response rate). Data for measures of aftermarket performance were collected from Standard and Poor’s Stock Reports and CRSP.
To examine whether the phenomenon of underpricing existed in the aftermarket, I calculated the following returns: (1) initial period return (after the first day of trading), (2) one-year buy and hold returns for the software IPOs, (3) the cumulative adjusted returns (CAR) calculated with quarterly portfolio rebalancing, where the adjusted returns were computed using one benchmark.
Major Findings
  • The mean first day return for the sample was 24.5%.
  • The mean one-year buy and hold return (excluding the first day returns) was 2.5%.
  • The mean CAR using the S&P 500 as a benchmark for one-year was –22.6%.
  • Overall, a greater number of firms went public during hot markets and their mean first day returns were significantly higher.
The results suggest that entrepreneurs of software firms should go public during hot markets. In the short-term, the average first day underperformance of software firms was 24.5%. This is significantly higher than the average underpricing of IPOs (14%). Furthermore, on average, software IPOs underperformed the S&P 500 index by 22.6% over a one-year period. The results indicate that the cost of external equity will be lower for software firms due to the low returns in the aftermarket. The high transaction costs of raising external equity are partly offset by the low realized long-term gains, at least for these firms going public at times when investor sentiment is high (hot markets). Finally, the volume of software IPOs displayed large variations over time and the high volume periods were associated with poor long-run performance. Therefore, this indicates that software entrepreneurs were successful at taking advantage of “windows of opportunity” (Ritter, 1991).
  • Software,
  • IPOs,
  • Underperformance,
  • Performance,
  • Entrepreneurs,
  • Entrepreneurship,
  • Valuation,
  • Software Industry,
  • Software IPOs,
  • Software Initial Public Offerings,
  • Trading,
  • Aftermarket Performance
Publication Date
Citation Information
Finkle, T.A. (1999). The performance of initial public offerings in the software industry. Frontiers of Entrepreneurship Research 1999: Proceedings of the Eighteenth Annual Frontiers of Entrepreneurship Research Conference. Edited by Paul D. Reynolds, William D. Bygrave, Sophie Manigart, Colin Mason, G. Dale Meyer, Harry Sapienza, & Kelly Shaver. University of South Carolina & Babson College: MA, 406.