In the United States, at the end of the first day of trading, the shares traded on average
at 18.9% above the offer price at which the company sold them (1990-2007). Underpricing
has averaged 21.2% in the 1960s, 9% in the 1970s, and increasing from 7.8% in the 1980s to
14.4% in the 1990s and to a surprisingly and severe underpricing of 63.5% that exceeded any
level previously seen in 1999 and 2000 (reflecting the internet boom years) before falling to
14% in 2001, averaged 11.8% from 2002 to 2006 before rising to 14% in 2007. These are the
average levels of underpricing observed in the United States IPO market. When we observe
these different levels and percentages of underpricing, we can say that underpricing fluctuates
so much and its level changes over time, but it is persistent over time. This anomaly is always
observed in the IPO market, whatever the industry to which the offering belongs and
whatever the period of going public. The level changes but this anomaly is persistent.
In dollar terms, IPO firms appear to leave many billions “on the table” every year in the U.S.
IPO market alone. But the highest amount is in 1999 and 2000, period of internet bubble, this
amount of money left on the table at IPO market has reached 66.63 billion dollars, an amount
that exceeded any level previously seen. It is the period of internet bubble that attracted the
attention of much research effort. Ritter documents that in 1999 and 2000 only, 803
companies went public in the United States, raising about $123 billion, and leaving about $65
billion on the table in the form of initial returns. Loughran and Ritter (2004)(1) explain lowfrequency
movements in underpricing (or first-day returns) that occur less often than hot and
cold issue markets. On a data for IPOs over 1980-2003, they find that IPO underpricing
doubled from 7% during 1980-1989 to almost 15% during 1990-1998 before reverting to 12%
during the post-bubble period of 2001- 2003, there are some level differences over time but
underpricing is persistent.
1 Loughran and Ritter (2004): “Why Has IPO Underpricing Changed Over Time?”.