Investing in IPOs?

A question from Yahoo! Answers:

Investing in newly floated companies?

Just a thought…. I guess new companies floating on the stock market make an interesting investment. High risk and possibly great gain??. Does anyone have any opinions on this? How can you find out about new floatation? Does ayone know how many occur in a typical year?

Companies issuing stock during 1970-1990, whether in an initial public offering (IPO) or a seasoned equity offering (SEO), have been poor long run investments for investors. During the five years after the issue, investors have received average returns of only 5% per year for companies going public and only 7% per year for companies conducting an SEO. Book to market effects account for only a modest portion of the low returns. An investor would have had to invest 44% more money in the issuers than in non-issuers of the same size to have the same wealth five years after the offering date.


Loughran, Tim, and Jay R. Ritter, 1995, “The new issues puzzle,” Journal of Finance 50, 23-51.

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