IPO Performance: Why Most IPOs Underperform the Market in the Long Run

The First-Day Pop: IPO Underpricing

The first-day pop — where an IPO's closing price on its first trading day is significantly above its offering price — is the most consistent empirical finding in IPO research. Academic studies across 50+ countries show an average first-day return of 18-20% in the US, with even larger pops in some markets (China averages 80%+, India 60%+). This underpricing is intentional: investment banks deliberately set the IPO price below the expected market-clearing price to ensure a successful offering, reward institutional clients, and generate positive media attention. The largest first-day pops in history include Renaissance IPO (IPOE, 2018) at 264%, TheTradeDesk at 186%, and Snowflake (SNOW, 2020) at 112%. However, the first-day pop is mostly captured by institutional investors who receive IPO allocations at the offering price. Retail investors who buy on the first day of trading typically buy at the elevated opening price and do not benefit from the pop — in fact, they often become the exit liquidity for the institutions that received allocations. The 18% first-day average return is the profit for allocated investors, not for first-day buyers. Compare IPO investing to diversified index fund investing →

Long-Run IPO Underperformance

The second major finding in IPO research is long-run underperformance. A seminal 1991 study by Ritter found that IPOs underperform comparable companies by approximately 3-5% annually over 3-5 years after listing. This underperformance persists across time periods and markets. A more recent study by Doidge, Karolyi, and Stulz (2019) found that only 30% of IPOs outperform the S&P 500 in their first 3 years. The reasons for this underperformance are debated but several theories have been proposed. The window of opportunity hypothesis: companies time their IPOs to coincide with peak valuations in their sector, meaning investors who buy at the IPO often pay peak prices. The signaling hypothesis: companies going public signal that their growth prospects are deteriorating (they would stay private if they expected continued high growth). The hype hypothesis: investment banks and company management hype the IPO story to maximize proceeds, creating unrealistic expectations that are disappointed over time. The dilution hypothesis: insiders and early investors use the IPO to sell shares, and the selling pressure from lockup expirations depresses returns for years. Whatever the cause, the empirical reality is clear: buying IPOs at the offer price or on the first day of trading and holding for the long term is a losing strategy on average. Understand why passive investing often beats active IPO strategies →

The Lockup Expiration Effect

Most IPOs include a lockup period — typically 180 days — during which company insiders, venture capital investors, and employees are prohibited from selling their shares. When the lockup period expires, a flood of additional shares becomes available for sale, often creating significant downward price pressure. A study by Field and Hanka (2001) found that lockup expirations are associated with an abnormal negative return of approximately 2-3% on the expiration date and sustained underperformance in the following weeks. The effect is strongest for IPOs that have performed well since listing (insiders have more incentive to take profits) and for IPOs with large insider ownership (more shares become available). Some insiders hedge their lockup exposure using derivatives like prepaid variable forwards and equity swaps, which can accelerate the selling pressure. For IPO investors, the lockup expiration date should be marked on the calendar. If you hold IPO shares, consider whether the additional supply will be absorbed by the market. Many traders sell IPO positions 2-4 weeks before the lockup expiration to avoid the predictable selling pressure. Learn how short sellers use lockup expirations as a trading catalyst →

Why do IPOs tend to underperform the market?

IPOs underperform for several structural reasons. First, adverse selection: companies that stay private are more likely to have strong growth prospects, while companies that go public may be seeking to capitalize on peak valuations (the "window of opportunity" hypothesis). Second, agency costs: the IPO process creates a misalignment of incentives — the company wants the highest possible price, the underwriters want a successful offering, and long-term investors want sustainable value creation. The IPO price is often set to maximize short-term success at the expense of long-term returns. Third, dilution: the IPO itself creates shareholder dilution, and subsequent equity offerings (secondary offerings) further dilute existing shareholders. Fourth, lockup expirations create an overhang of selling pressure that depresses returns for 6-12 months after listing. Fifth, information asymmetry: company insiders and their bankers know more about the company than public investors, and they tend to sell at the most favorable time for them, not for new investors. Sixth, the IPO market is subject to waves of optimism — during hot IPO markets (1999-2000, 2020-2021), lower-quality companies go public at inflated valuations, setting up long-term underperformance. The combination of these factors creates a structural disadvantage for IPO investors. Why time in the market beats timing the IPO market →

How can I identify IPOs that will outperform?

Identifying outperforming IPOs requires a disciplined screening process. Look for IPOs with the following characteristics. Revenue growth: IPOs with strong, profitable revenue growth (not just growth at any cost) tend to outperform. Unit economics: IPOs with positive gross margins and a clear path to profitability perform better than high-burn companies. Insider retention: if insiders sell significant shares in the IPO (the secondary offering component is large), it is a warning sign — they are cashing out at the expense of new investors. Underwriter quality: IPOs underwritten by top-tier banks (Goldman Sachs, Morgan Stanley, JPMorgan) tend to have better long-term performance. Valuation: IPOs priced at reasonable valuations relative to their growth rates and peer companies have better prospects than those at extreme multiples. Sector: IPOs in sectors with strong secular tailwinds (technology, healthcare, clean energy) have better long-term prospects than cyclical or declining sectors. Institutional sponsorship: IPOs with strong institutional investor participation in the book-building process tend to have more stable post-IPO performance. A final screen: wait 6-12 months after the IPO before buying — this allows the initial hype to fade, lockup selling to occur, and the stock to find a more sustainable price level. Most IPO outperformance is achieved by buying 6-12 months after listing, not on day one. Apply growth investing principles to IPO selection →

What is the best strategy for investing in IPOs?

The best IPO strategy depends on your access and time horizon. For retail investors without access to IPO allocations at the offering price (which is the vast majority), the optimal strategy is patience. Do not buy IPOs on the first day — the initial hype inflates prices, and studies show that buying on the open market on day one produces negative excess returns on average. Instead, wait 6-12 months after the IPO. By this time, the lockup period has typically expired, insiders and early investors have sold, and the stock has found a more stable trading range. At this point, you can evaluate the company based on its public financial statements and trading history rather than the IPO hype. If you have access to IPO allocations (through a broker like Fidelity, Charles Schwab, or Robinhood that offers IPO access), consider the offering price carefully. Only participate in IPOs where the valuation is reasonable relative to comparable public companies. A second strategy is to invest through IPO-focused ETFs like the Renaissance IPO ETF (IPO), which provides diversified exposure to newly public companies and avoids single-stock risk. The ETF approach captures IPO market returns without requiring individual stock selection or timing. Learn about IPO ETFs and how they work →

How do SPACs compare to traditional IPOs in terms of performance?

Special purpose acquisition companies (SPACs) — blank-check companies that raise money through an IPO to acquire a private company — have generally performed worse than traditional IPOs. SPACs boomed in 2020-2021, with over 600 SPACs raising $160 billion. Research by academics including Klausner and Ohlrogge (2022) found that SPAC investors (those who buy at the IPO and hold through the de-SPAC merger) lose approximately 15-20% on average over 12 months post-merger. The underperformance is driven by several factors: dilution from sponsor promote (the 20% of shares given to SPAC sponsors for free), warrant redemptions, redemption rights (which force the SPAC to hold cash earning minimal interest), and the inherent conflict where sponsors are incentivized to complete any deal rather than a good deal (the "burning cash" problem). The due-diligence sponsors perform on target companies is often inferior to traditional IPO underwriting. A small number of high-quality SPACs — those with experienced management teams, reasonable sponsor terms, and strong target companies — have performed well, but the asset class as a whole has been a poor investment for retail buyers. The best SPAC strategy: avoid buying before the merger announcement and only evaluate the post-merger company as a regular public company with a public track record. Understand the risks and returns of SPAC investing →

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