Institutional investors and firm performance: Evidence from IPOs

We investigate the post-IPO evolution of institutional investor holdings and the manner in which operating performance is related to these holdings. During the first year after the IPO, average institutional holdings increase from 24% to 36% of shares outstanding and stabilize at about 42% by the end of the second year. We document that post-IPO operating performance is positively related to institutional holdings, but this relation subsides in the third year after the IPO. Overall, our findings indicate that institutional ownership is a valid indicator of the firm’s operating performance in its initial years as a public company.