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 low-frequency 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?”.