The Long-Run Performance of Initial Public Offerings

Posted: 17 Nov 2009

See all articles by Jay R. Ritter

Jay R. Ritter

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: 1991


Two anomalies have been documented in the performance of initial public offerings (IPOs): (1) in the short-run they are underpriced, and (2) they are subject to the "hot issue" market phenomenon. This analysis identifies a third anomaly: in the long-run, IPOs appear to be overpriced. Examined a sample of 1,526 IPOs offered in the 1975-84 period. Several measures were devised to evaluate long-run performance of IPOs. Found that in the three years after going public, the firms significantly underperformed a comparable set of firms. The IPOs returned 34.5 percent, while a control sample returned 61.9 percent. Possible explanations include risk mismeasurement, bad luck, and fads or over-optimism. Found there is considerable variation in underperformance year-to-year. Those firms going public in high-volume years suffered most -- the underperformance is concentrated among young growth companies going public in the high-volume years of the early 1980s. This pattern is consistent with firms going public when investors are irrationally over optimistic about earning potential of young firms in certain industries; firms exploit these "windows of opportunity" or go public near the peak of industry-specific fads. (TNM)

Keywords: Startups, Initial public offerings (IPO), Securities offerings, Valuation, Underpricing, Market value

Suggested Citation

Ritter, Jay R., The Long-Run Performance of Initial Public Offerings (1991). Journal of Finance, Vol. 46, Issue 1, p. 3-27 1991. Available at SSRN:

Jay R. Ritter (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
(352) 846-2837 (Phone)
(352) 392-0301 (Fax)


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