Industry clustering of initial public offerings

Extant empirical evidence has documented both a temporal variation in the number of initial public offerings (IPOs) and an industry clustering effect in these offerings. This article attempts to provide insights into this phenomenon by: (i) identifying industry conditions that influence IPO clustering, (ii) analyzing differences in characteristics of clustered versus non-clustered IPOs, and (iii) studying the impact of IPO clustering on long-run operating performance. We find that IPO clustering is more likely to occur in high-growth fragmented industries that are characterized by strong investment opportunities, favorable investor sentiment, and which require high levels of investments in R&D. Further, we document a negative relation between post-IPO operating performance and whether the IPO firm goes public in its industry cluster period. We conclude that the relatively poor post-IPO operating performance of firms that go public in industry cluster periods likely reflects industry overinvestment arising from too many firms within that industry chasing the same investment opportunities. Copyright © 2005 John Wiley & Sons, Ltd.