Institutional investment in IPOs and post-IPO M & A activity

Secondary market stock returns of newly public firms with high levels of institutional investment exceed returns of firms with low institutional investment (Field and Lowry, 2009). We find that a material portion of this performance differential is attributable to institutional investment in firms that participate in mergers and acquisitions after their initial public offerings (IPOs). Specifically, institutions not only tend to avoid underperforming firms, on average, but also invest heavily in IPO firms that subsequently become M & A participants, especially well performing bidders and targets. Superior returns among firms with high institutional ownership suggests the ability of institutional investors to identify and actively monitor newly public M & A participants.