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Outside Insiders: Does Access to Information Prior to an IPO Generate a Trading Advantage After the IPO?

Journal of Financial and Quantitative Analysis 2019 54(1), 303-334
We investigate whether access to information prior to an initial public offering (IPO) generates a trading advantage after the IPO. We find that limited partners (LPs) of lead venture capital funds obtain high returns when they invest in newly listed stocks backed by their funds. These returns are not explained by LPs’ differing stock-picking abilities, and they are higher when LPs’ information advantage over the public is higher. LPs are more likely to invest if they have an information advantage, and access to information eliminates the familiarity bias that they display otherwise.