We investigate the determinants of institutional investors’ holdings in IPO firms and the post-issue relation between these holdings and operating performance. We find that institutions’ initial holdings strongly depend on IPO characteristics, in particular, the public float. After controlling for public float, initial institutional holdings are unrelated to pre-IPO operating performance. 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. Furthermore, post-IPO operating performance is positively related to institutional holdings. This relation holds also in lags, but diminishes towards 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.



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