Initial Public Offerings (IPOs) are known to generate considerable excitement among investors, yet historical evidence suggests a cautious approach is warranted. Data compiled by Jay Ritter of the University of Florida indicates that US IPOs have delivered an average first-day return of approximately 18 to 19 per cent since 1980.
However, this initial gain largely benefits institutional investors who receive allocations at the offer price, rather than those who buy shares once trading begins. Securing allocations in highly anticipated deals is often difficult, while weaker deals are more readily available, a situation described as the 'winner's curse'.
Newly listed companies can also struggle to maintain early momentum. Ritter's research found that IPOs significantly underperformed comparable firms in the initial years post-listing, particularly smaller, unprofitable companies. This pattern appears linked to companies issuing shares when investor enthusiasm and valuations are near their peak.
The empirical record suggests that patient investors may find better entry points in the quarters following a listing, rather than during the initial euphoric days. Lock-up expiries, when insider selling restrictions are lifted, can also lead to additional downward pressure on share prices if demand does not increase to match the additional supply.