The Dismal Track Record of IPOs

While many investors think that initial public offerings (IPOs) are exciting, they are risky investments. Academic research shows overwhelmingly that the returns to investors are not commensurate with the risk.

Classical economic theory suggests that because they are riskier, IPO investors should expect higher returns as compensation. However, a large body of evidence demonstrates that unless you are sufficiently well connected (to a broker-dealer who is part of the issuing syndicate) to receive an allocation at the IPO price, IPOs have generally underperformed the overall market, and by wide margins. Confirming evidence on this phenomenon has been detected in the U.S., the U.K., Australia, Germany and France.

The most recent evidence is from Smadar Siev and Mahmoud Qadan, authors of the September 2022 study, “Call Me When You Grow Up: Firms’ Age, Size, and IPO Performance Across Sectors,” in which they examined the near- and longer-term performance of 1,611 U.S. IPOs spanning 11 sectors over the period 2009-2019. Abnormal returns were calculated against three different benchmarks: the S&P 500, the Russell 2000 and sector indices. Following is a summary of their findings: