Why research matters for practitioners
Academic and industry research on IPOs is extensive. It does not predict how a single IPO will perform, but it explains recurring patterns that bankers, investors and issuers negotiate around. Knowing them helps management judge advice and set expectations.
This guide summarises well-established concepts without figures; where ipo.zone publishes numbers in the future, they will be sourced from official data.
Underpricing: the first-day pop
The pattern. The average IPO has historically closed its first trading day above its offer price, across many countries and periods. The size varies a lot by market, period and sector, and some IPOs fall on day one.
Explanations researchers have proposed:
- Information asymmetry. Investors know less than insiders. A discount compensates them for the risk of buying a "lemon".
- Winner's curse. Less informed investors receive full allocations in weak deals and small allocations in strong ones; underpricing keeps them participating.
- Information revelation in bookbuilding. Investors who share honest demand and price information during bookbuilding are rewarded with allocations at an attractive price.
- Signalling. A good aftermarket helps the company raise more capital later.
- Underwriter incentives. Banks balance issuer interests with those of investor clients.
- Behavioural factors. Sentiment, attention and momentum in the first days of trading.
Money left on the table is the first-day price gain multiplied by the number of shares sold. It measures how much more the company and sellers could theoretically have raised. Calculate it with the first-day return calculator.
Long-run performance
Several studies have found that, measured over three to five years, IPO shares on average underperformed comparable listed companies or market indices. Others found the effect smaller or absent once size, value characteristics and methodology are controlled for. Results vary with period, market, benchmark and whether returns are equally or value weighted.
What practitioners take from this debate:
- A strong first day says little about long-term returns.
- Companies listing at peak valuations in hot markets carry a higher risk of disappointing later.
- Delivering on the equity story in the first years drives long-run performance far more than the IPO price.
Hot and cold markets
IPO volume moves in waves. In hot markets, many companies list, valuations are high and first-day returns tend to be large. In cold markets, windows close and deals are postponed. Drivers include equity market levels and volatility, sector sentiment, recent IPO performance and the supply of private companies ready to list.
For issuers, readiness is the best hedge: a company ready to go can use a window when it opens.
Lock-up expiry effects
Researchers have observed price pressure around lock-up expiry dates, when a large number of shares becomes eligible for sale. Markets expect it, but the effect can still be visible, especially when venture or private equity investors hold large stakes.
Underwriter and investor effects
- Deals led by more reputable banks have, in some studies, shown different pricing and aftermarket patterns, though causality is debated.
- The presence of long-term anchor investors and broad, high-quality demand is associated with more stable aftermarkets.
- Stabilisation and the greenshoe reduce early downside, but only for a limited period.
What this means for the IPO team
- Price for the aftermarket. A fair discount and a quality book matter more than squeezing the last cent.
- Allocate to long-term holders. It improves stability after stabilisation ends.
- Plan lock-up expiries. Communicate early and consider orderly placements.
- Measure honestly. Track first-day, 30-day and 180-day performance against relevant indices; the IPO Tracker will provide sourced data for this.