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How Do Stocks Perform AFTER An IPO?

With all of the recent initial public offerings (IPOs), we have increasingly been asked about the prospects for various stocks once the IPO has occurred. While owners of private (pre-IPO) companies are curious about the value of their stock, those who own public (post-IPO) companies face an actual decision of whether to hold or sell their stock.

A recent study from Dimensional Fund Advisors (a quant firm that we work with) recently published some data on the topic. In short, they found that after the first day of trading, post-IPO companies tend to underperform the broader market. Dimensional summarized the data in a recent post and the closing sentence reads, "Investors should also understand that IPOs have generally underperformed broader market benchmarks in recent decades and that their fundamental characteristics suggest lower expected returns." We would note that this is a general statement; some IPOs outperform and some underperform, but Dimensional's data suggest that they generally underperform. As evidence-based advisors, MFA frequently recommends divesting from post-IPO stock (in a tax-efficient manner, if possible).

Again, Dimensional's data relates to the average IPO and every stock is unique. Thus, while there is an answer to the question of how stocks perform immediately after an IPO, the answer is not terribly actionable and any decision must be made without certainty. Given the uncertainty about any particular stock, we find that making a good decision often comes down to personal factors like financial goals, risk-tolerance, the tax treatment of the options and stock owned, household tax situation, as well as particulars like lockup and blackout periods. These things are knowable and often controllable, unlike the future performance of a stock which is neither.