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This article investigates the links between hot markets, venture capital and long-run underperformance using a unique sample of 591 UK IPOs 1985-2003. It finds no evidence for long-run underperformance for the full sample in line with the classical position. However, cumulative abnormal returns are significantly negative in hot markets and the return differential between hot and normal markets is also statistically and economically significant. This return differential holds relative both to the initial period closing price and the offer price and is consistent with issuers using market timing to exploit investor sentiment during hot markets. Finally, the results offer no support for a certification role by venture capitalists.
