First day of IPO doesn’t show long haul
It takes more than just a first-day price leap for an initial public offering to do well, according to a study.
It takes more than just a first-day price leap for an initial public offering to do well.
There are numerous ingredients that go into the recipe for the successful IPO, according to a study from Ernst & Young LLP, which will be released tomorrow.
The study covers 110 recent listings that have entered the Russell 2000 index and examines the patterns that the top performers have in common.
Seventy-five percent of the companies that purchased a stake in another company after their IPOs beat the index, showing that management can handle acquisitions and still concentrate on performance, The Wall Street Journal reported.
Deep-pocketed investors who will back the company are also another plus for success, the study found.
About 40% of the IPOs that beat the index had at least 80 institutional investors, including mutual funds and pension funds.
Those with fewer than 40 institutional investors fell short of the index more than twice as often as they beat it, according to the study.
Additionally, a good stock collects a good following: A large shareholder base shows that executives can explain a strong business plan when the stock gets marketed, said Maria Pinelli, Ernst & Young’s Americas director for strategic growth markets.
Of course, while IPOs’ first-day returns aren’t related to long-term gains, sales numbers are correlated to long-term performance.
“Companies going public with less than $10 million in annual sales tend to have a really bad performance,” said Jay Ritter, a finance professor at the University of Florida.
But those with at least $50 million in sales were much better off.
Learn more about reprints and licensing for this article.
