It is well known that most IPOs have extraordinary return on the first day of trading...

It is well known that most IPOs have extraordinary return on the first day of trading but under perform the general market in the next 5 years. Why do issuers intentionally under price their shares at beginning? And why do you think IPOs under perform in the long term?

Expert Solution

There is a euphoria of initial public offer at the time of the listing and there is most of the times over subscription for the initial public offer of various new companies but once this settle in, the value seems to get eroded as the yuphoria is over

Companies deliberately set lowest prices for their IPO offerings because it will attract a lot of investors and it will also provide good value to various investors to enter into the company for the long run because there is high euphoria and oversubscription people tend to lose rationality and follow the herd.

Once the shares settle in the long run, it start to reflect it's true value which is according to multiple earning reports and various news which have been discounted and the Euphoria seems to get eroded because there is no operational performance according to the euphoria which was created the time of the IPO.

This type of price performance can be seen through recent listing of SPOTIFY and UBER.

jeff jeffy answered 2 years ago

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