The Risk in IPOs

The best time to buy a company’s stock is when you can get in on the ground floor, at the initial public offering. Right? Wrong. Very wrong. A research paper published this year looked at 1,611 initial public offerings from 2009 to 2019, measuring their return to investors over different time spans. They found that the offerings of smaller companies underperformed the market by 42.77% in the first year after the IPO, by 89.26% after two years and by 113.91% after three years. Larger companies underperformed by 14.59%, 27.74% and 25.57% one, two and three years postIPO.

The lesson, of course, is that many companies go public before they’re fully mature; getting in on the ground floor tends to mean that you’re buying (to stretch the analogy) an incomplete building that may or may not be built out the way you might have envisioned. This study may also tell us that companies tend to be overhyped after they’ve pay Wall Street brokers to sell those initial shares—but does anyone actually believe a wirehouse firm would try to inflate the value of something its brokers are paid handsomely to sell?


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