Is IPO Underperformance a Peso Problem?

Recent studies suggest that the underperformance of IPO's in the post-1970 sample may be a small sample effect or Peso problem. That is, IPO underperformance may be due to observing too few star performers ex-post than were expected ex-ante. We develop a model of IPO performance that captures this intuition, by allowing returns to be drawn from mixtures of outstanding, benchmark, or poor performance. We estimate the model under the null of no ex-ante average IPO underperformance to construct small sample distributions of various statistics measuring IPO relative performance. We find that small sample biases are extremely unlikely to account for the magnitude of the post-1970 IPO underperformance observed in data.