The Journal of Finance

The Long‐Run Performance of initial Public Offerings

Published: 03/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb03743.x

JAY R. RITTER

The underpricing of initial public offerings (IPOs) that has been widely documented appears to be a short‐run phenomenon. Issuing firms during 1975–84 substantially underperformed a sample of matching firms from the closing price on the first day of public trading to their three‐year anniversaries. There is substantial variation in the underperformance year‐to‐year and across industries, with companies that went public in high‐volume years faring the worst. The patterns are consistent with an IPO market in which (1) investors are periodically overoptimistic about the earnings potential of young growth companies, and (2) firms take advantage of these “windows of opportunity.”

Signaling and the Valuation of Unseasoned New Issues: A Comment

Published: 09/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03907.x

JAY R. RITTER

The Buying and Selling Behavior of Individual Investors at the Turn of the Year

Published: 07/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb04601.x

JAY R. RITTER

The average returns on low‐capitalization stocks are unusually high relative to those on large‐capitalization stocks in early January, a phenomenon known as the turn‐of‐the‐year effect. This paper finds that the ratio of stock purchases to sales by individual investors displays a seasonal pattern, with individuals having a below‐normal buy/sell ratio in late December and an above‐normal ratio in early January. Year‐to‐year variation in the early January buy/sell ratio explains forty‐six percent of the year‐to‐year variation in the turn‐of‐the‐year effect during 1971–1985.

Report of the Membership Chair

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb02734.x

Jay R. Ritter

Portfolio Rebalancing and the Turn‐of‐the‐Year Effect

Published: 03/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb02409.x

JAY R. RITTER, NAVIN CHOPRA

This paper finds that, for the 1935–1986 period, the market's risk‐return relation does not have a January seasonal. The findings differ from those of other studies due to the use of value‐weighted, rather than equally weighted, portfolios. Inferences are sensitive to the weighting procedure because of the small‐firm return patterns in January. In particular, even in those Januaries for which the market return is negative, small‐firm returns are positive, and they are more positive the higher is beta. This is consistent with the portfolio rebalancing explanation of the turn‐of‐the‐year effect.

The Operating Performance of Firms Conducting Seasoned Equity Offerings

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb02743.x

TIM LOUGHRAN, JAY R. RITTER

Recent studies have documented that firms conducting seasoned equity offerings have inordinately low stock returns during the five years after the offering, following a sharp run‐up in the year prior to the offering. This article documents that the operating performance of issuing firms shows substantial improvement prior to the offering, but then deteriorates. The multiples at the time of the offering, however, do not reflect an expectation of deteriorating performance. Issuing firms are disproportionately high‐growth firms, but issuers have much lower subsequent stock returns than nonissuers with the same growth rate.

The New Issues Puzzle

Published: 03/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb05166.x

TIM LOUGHRAN, JAY R. RITTER

Companies issuing stock during 1970 to 1990, whether an initial public offering or a seasoned equity offering, have been poor long‐run investments for investors. During the five years after the issue, investors have received average returns of only 5 percent per year for companies going public and only 7 percent per year for companies conducting a seasoned equity offer. Book‐to‐market effects account for only a modest portion of the low returns. An investor would have had to invest 44 percent more money in the issuers than in nonissuers of the same size to have the same wealth five years after the offering date.

A Review of IPO Activity, Pricing, and Allocations

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00478

Jay R. Ritter, Ivo Welch

We review the theory and evidence on IPO activity: why firms go public, why they reward first‐day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective is threefold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena. Instead, we believe future progress in the literature will come from nonrational and agency conflict explanations. We describe some promising such alternatives.

Long‐Term Market Overreaction: The Effect of Low‐Priced Stocks

Published: 12/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb05234.x

TIM LOUGHRAN, JAY R. RITTER

Conrad and Kaul (1993) report that most of De Bondt and Thaler's (1985) long‐term overreaction findings can be attributed to a combination of bid‐ask effects when monthly cumulative average returns (CARs) are used, and price, rather than prior returns. In direct tests, we find little difference in test‐period returns whether CARs or buy‐and‐hold returns are used, and that price has little predictive ability in cross‐sectional regressions. The difference in findings between this study and Conrad and Kaul's is primarily due to their statistical methodology. They confound cross‐sectional patterns and aggregate time‐series mean reversion, and introduce a survivor bias. Their procedures increase the influence of price at the expense of prior returns.

The Seven Percent Solution

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00242

Hsuan‐Chi Chen, Jay R. Ritter

Gross spreads received by underwriters on initial public offerings (IPOs) in the United States are much higher than in other countries. Furthermore, in recent years more than 90 percent of deals raising $20–80 million have spreads of exactly seven percent, three times the proportion of a decade earlier. Investment bankers readily admit that the IPO business is very profitable, and that they avoid competing on fees because they ‘don't want to turn it into a commodity business.’ We examine several features of the IPO underwriting business that result in a market structure where spreads are high.

The Quiet Period Goes out with a Bang

Published: 02/12/2003   |   DOI: 10.1111/1540-6261.00517

Daniel J. Bradley, Bradford D. Jordan, Jay R. Ritter

We examine the expiration of the IPO quiet period, which occurs after the 25th calendar day following the offering. For IPOs during 1996 to 2000, we find that analyst coverage is initiated immediately for 76 percent of these firms, almost always with a favorable rating. Initiated firms experience a five‐day abnormal return of 4.1 percent versus 0.1 percent for firms with no coverage. The abnormal returns are concentrated in the days just before the quiet period expires. Abnormal returns are much larger when coverage is initiated by multiple analysts. It does not matter whether a recommendation comes from the lead underwriter or not.