Is it generally true that all IPO’s plunge soon after they are offered?
Zoraida asks:
wwould it make sence to wait for the average ipo to come to a quick peak and then breifly sell short?
wwould it make sence to wait for the average ipo to come to a quick peak and then breifly sell short?
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it would make sense generally, however, shorting is not possible until after six month from IPO
Yes it is generally true that IPO’s generally fall face first right out of the gate. IPO’s are generally over-priced due to the initial demand for shares from institutions and other large group investors eager to make a profit from the bargain price they can recieve before it reaches the public. But yes you can’t short these stocks for six months so your better bet would be to buy them at their 52 wk low if its a good company and wait til they come back.
No — it is not true at all.
In the 1990s, Jay Ritter wrote a well known paper that shows that a portfolio of IPOs does not perform as well as the market over a horizon of five years. For a while, this was a big puzzle in finance. This is the origination of the myth that IPOs underperform the market.
In the late 1990s, there were two papers that came out that solved this problem. One was by Eckbo and Norli (Espen Eckbo is at the Tuck School). The other is by Duke’s Alon Brav and two coauthors.
The two papers are very different — but both showed that Ritter’s results go away when you adjust for risk. On a risk-adjusted bases, IPOs perform as expected.
Basically what happened is this. We all know that IPOs are riskier than ordinary companies in terms of volatility. But much of that risk is diversifiable risk. IPO companies don’t usually have high betas compared to other companies — primarily because they tend to have very little debt. So, when you compare a portfolio of IPOs with a beta less than the market, you should expect it to underperform the market. If you lever that portfolio so that it has the same risk as the market — you should expect it to perform as well as the market, and it does.
Incidently, CrazyTimes77 is completely wrong about IPOs. It is not true that they are usually overpriced and fall after being issued. In fact, they are usually underpriced and jump up in value on the first day. This is a well documented phenomenon.
As for shorting IPOs, it is usually difficult to short them right after IPO, because it is difficult to borrow the shares — but it is possible. It is also unwise, because the lead manager of the IPO will support the price for a while — keeping you from making a profit on your short.