IPOs: The Third Year On

Abstract

An initial public offering (IPO) is basically a market funding event, with young firms signifying their rite of passage to the public capital market. The general public may have treated IPO investing like a lottery simply because they have a minute chance of explosive payoffs; yet historically, IPOs have underperformed the market in their early years. In this study, the authors find that over the last 90 years of U.S. stock market history, there is at best some weak evidence that significant IPO underperformance has existed only in the first two years after issuance. However, the authors show, for the first time, strong evidence that IPOs actually outperformed from the third year on. They postulate that the “reversal of IPOs’ fortune” is a result of private firms exercising a “going public” option while simultaneously creating a “going private” option.

TOPICS: Fundamental equity analysis, performance measurement