If you weren’t able to buy shares of the summer’s hottest initial public offering, Baidu.com, fear not. History shows that investors may be better off without the IPO of the moment.
IPOs that doubled, tripled or quadrupled their first day of trading have often come to bad ends. IPOs with less stellar first days don’t exactly burn up the tracks with their long-term performance either. The fact is, IPOs in general may not be as good an investment as many investors believe.
Jay R. Ritter, a professor of finance at the University of Florida who specializes in IPOs, studied IPO companies’ five-year stock performance versus companies of the same size and book-to-market ratio.
What Ritter found, studying the period between 1970 and 2003, was that IPOs had lower returns than similar companies by 4.1 percent over five years. He broke his research down into decade-long chunks, but the results were the same: IPO returns were lower than their peers.
What about the must-have IPOs, the one-day wonders? Ritter also created a list of the biggest one-day winners, companies that doubled their first day of trading.
Investors who held on to some of those companies, including auction gorilla eBay Inc., are flush indeed. But many of the companies that doubled on Day One fell hard.
Only investors who dumped those stocks at the perfect time have reason to be smug.
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