The Long-Run Performance of initial Public Offerings



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    • Associate Professor of Finance, University of Illinois at Urbana-Champaign. I wish to thank Clifford Ball, Chris Barry, Stephen Buser (the editor), Donald Keim, Josef Lakonishok, Gita Rao, Nejat Seyhun, René Stulz, Michael Vetsuypens, Ivo Welch, Joseph Williams, an anonymous referee, participants in workshops at Illinois, Iowa, Vanderbilt, and Wharton, and especially Harry DeAngelo for helpful suggestions. An earlier version of this paper was presented at the December 1988 AFA meetings, the September 1989 Garn Institute conference on The Capital Acquisition Process, the November 1989 CRSP Seminar on the Analysis of Security Prices, and the October 1990 Q Group meetings. Navin Chopra, Tim Loughran, and Tae Park provided extensive and very able research assistance. The research is partially supported by a grant from the Institute for Quantitative Research in Finance.


The underpricing of initial public offerings (IPOs) that has been widely documented appears to be a short-run phenomenon. Issuing firms during 1975–84 substantially underperformed a sample of matching firms from the closing price on the first day of public trading to their three-year anniversaries. There is substantial variation in the underperformance year-to-year and across industries, with companies that went public in high-volume years faring the worst. The patterns are consistent with an IPO market in which (1) investors are periodically overoptimistic about the earnings potential of young growth companies, and (2) firms take advantage of these “windows of opportunity.”