Why do many IPOs underperform post-listing?

The short answer

Buying IPOs at the post-pop secondary market price and holding them for several years has historically produced returns below those available from equivalent established stocks. This is one of the most-studied anomalies in finance, with three decades of data confirming the basic pattern.

The mechanism is not mysterious: companies tend to go public when their owners believe shares are favorably priced, which means the supply of newly public stock is concentrated at moments of optimism — exactly the moments when subsequent returns are likely to disappoint.

The nuance worth keeping is that the effect is concentrated in specific subsets — small-cap IPOs, IPOs from high-volume hot markets, technology and biotech offerings — and is debated methodologically. Investors who allocate carefully across IPO categories can mitigate but not eliminate the structural drag.

→ New to investing fundamentals? Equity valuation: real rates, multiples, earnings

What the data shows

The empirical record on IPO long-run performance (Ritter, Loughran-Ritter, Gompers):

• Ritter’s original 1991 study: 1,526 IPOs from 1975-84 produced an average three-year buy-and-hold return of 34.5% versus 61.9% for size-matched control firms — an underperformance gap of approximately 27 percentage points over three years
• Updated Ritter dataset (March 2026, returns through Dec 31, 2025): equally-weighted underperformance versus size-and-book-to-market matched firms of approximately 2.1% per year over five years post-IPO
• 9,343 operating-company IPOs included in the long-run dataset spanning 1980-2024
• “Broken IPOs” analysis: 442 of 654 broken IPOs (67.6%) produced negative three-year buy-and-hold returns from the offer price
• The effect is highly concentrated in IPOs from high-volume “hot” issuance years and in IPOs with low pre-IPO sales (under $100 million inflation-adjusted)

The exception worth noting: large IPOs of established profitable companies (LTM sales above $1 billion) have shown much smaller and statistically insignificant underperformance. The anomaly is driven by smaller, less-profitable, growth-oriented offerings — which is consistent with the “windows of opportunity” hypothesis.

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Why it happens — the macro mechanism

The IPO underperformance puzzle has multiple competing explanations that probably all contribute partially.

Channel 1 — Issuer market timing. Companies and their early investors choose when to go public. They tend to choose moments when they believe valuations are favorable to sellers. This selection bias means the supply of newly public stock is systematically concentrated at peaks of investor enthusiasm — moments when subsequent returns are most likely to disappoint as enthusiasm fades and fundamentals reassert.

Channel 2 — The Gompers calendar-time critique — the angle worth highlighting. Gompers (NBER 2001) extended the analysis back to 1935 and showed that long-run IPO underperformance largely disappears when measured in calendar-time rather than event-time. The implication is that what looks like an “IPO anomaly” may partly be a small-cap, growth-stock, or factor-exposure phenomenon — IPO firms tend to be small, fast-growing, and concentrated in volatile sectors, and adjusting for these style exposures eliminates much of the apparent underperformance. This methodological point matters: investors hoping to “fix” their portfolio by avoiding IPOs may simply be expressing a small-cap-growth bet without realizing it.

Channel 3 — Lockup expiration and supply effects. IPO insiders typically face 180-day lockup restrictions on selling. When lockups expire, the float dramatically increases, often pressuring share prices. Empirical work documents systematic negative returns around lockup expirations, contributing to the headline underperformance over the first year. Stock valuations overall move with similar supply-demand dynamics, though the IPO case is particularly pronounced.

Synthesis by regime: in the 1980s, with low IPO volume and modest pricing pressure, underperformance was real but moderate; in the 1999-2000 internet bubble, underperformance was extreme — many high-flying IPO names lost 80-95% of their value in the subsequent two years; in the post-2010 environment, underperformance moderated as IPO underwriting standards tightened and as the average company going public became larger and more profitable. The 2020-2021 wave of SPAC mergers and de-SPACs reproduced the historical pattern in compressed form: many SPAC-merged companies underperformed by 50%+ within two years of their public market debut.

The “windows of opportunity” hypothesis is uncomfortable for retail investors — by the time an IPO is available to you, the seller has already decided this is a good time to sell.

→ Working framework: Why valuations matter long-term

What it means for different economic actors

Retail investors face structural disadvantages in IPO investing: no allocation access at the offer price, secondary purchase at the post-pop premium, and exposure to the 1-3 year underperformance window. The historical risk-adjusted reward of buying at the post-pop secondary price has been consistently negative on average — though individual cases can produce extreme positive returns.

Institutional investors with allocation access face a different math: they receive shares at the offer price and benefit from the first-day pop. Their relevant horizon is often shorter than the period over which long-run underperformance manifests.

Venture capital and private equity firms benefit from IPOs as exit routes regardless of post-listing performance, since their fiduciary duty ends at the distribution to LPs. VC mechanics are partially built on IPO exit assumptions even when the resulting public companies underperform.

A common error is to extrapolate average IPO underperformance to all IPOs uniformly. The effect is heavily concentrated in specific subcategories (small-cap, growth, hot-market issuance) and large established companies going public have shown much weaker underperformance.

Practical observation

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Frequently asked questions

Has IPO underperformance disappeared in recent years?

The Ritter long-run dataset updated through December 2025 continues to show approximately 2.1% annual underperformance versus size-matched controls, suggesting the effect persists. However, the magnitude has moderated from the 1990s peaks, and the effect is now heavily concentrated in smaller IPOs. Large, established, profitable companies going public — increasingly common as private companies stay private longer — show much weaker underperformance, and in some recent years no statistically significant gap. The puzzle has not disappeared but has narrowed in scope.

Why doesn’t arbitrage eliminate IPO underperformance?

Several friction-based explanations have been proposed. Short-selling IPO stocks is constrained by limited share availability in the post-IPO period when most shares remain locked up with insiders. Information asymmetry is high — analyst coverage is often thin in the months after an IPO. Lockup-expiration timing creates predictable supply pressure but the timing varies by company. And career-risk concerns may make institutional investors reluctant to short high-profile IPO names that could rally on positive news. These frictions help the anomaly persist longer than standard efficient-market theory would predict.

What did Gompers (NBER 2001) actually show?

Paul Gompers extended Ritter’s dataset back to 1935 and re-analyzed using both event-time and calendar-time methods. In event-time analysis (averaging returns relative to each IPO’s date), he confirmed the underperformance pattern; in calendar-time analysis (averaging returns across all IPO firms in each calendar month), the underperformance largely disappeared and IPO returns became indistinguishable from those of equivalent small-growth firms. The interpretation depends on which methodology one finds more appropriate. Gompers’ work raised the possibility that “IPO underperformance” is partly a manifestation of small-cap-growth factor underperformance during certain periods, rather than an IPO-specific anomaly.

Last updated — 12 July 2026