While markets are up over the past few months, stocks of 3 of the most recent, and at the time, hottest I.P.O’s have gone the other way. Two of the lesor ones in the mainstream being Groupon and Zynga are off almost 50% while the big elephant in the room is Facebook which debuted to widespread media attention is now down 35% from its I.P.O. price and 50% from the high of $38 it reached in its first days.
A key reason for the falls in these shares, and similar I.P.O.’s are the expiration of lock up periods that founding investors have. In many cases they must hold the shares for a period of time after listing. When these periods expire, on average, stocks prices fall by around 1.5% for the companies subject to these periods after listing.
Based on research from Professor Jay Ritter of the University of Florida he found that the three-year buy-and-hold return of IPO stocks, from 1980 through 2011, lagged the average three-year cumulative returns of similar non-IPO stocks by 7.4%. His research also showed that, from 1970 to 2010, IPOs have underperformed similar non-IPO stocks by an average of 1.8% per year during the first five years after issuance
So the next time someone has a hot I.P.O. that can;t miss, maybe think again.