Some good research has been made for writing this article, but there are some important details from the world of finance and trading which we need to consider.

First: do not forget about risks.

IPO is a risky price discovery process and it is quite uncertain what the price will be after listing. Transitioning from private life to the life of public trading is a massive change and there are many factors which influence the price, and which can’t be controlled. Investors who participate in an IPO are taking quite a lot of risk as the price might go in either direction. The IPO “discount” which leads to "pop" exists mainly to compensate investors for the risks they are taking, not necessarily to please them. So, the risky stocks which are difficult to price have high IPO pop because their price discovery is more difficult, hence they are also the ones who frequently go down after initial trading – quite frequently technology stocks fall into this category.

Second: after initial trading, many other investors influence the price, who are not investors at IPO.

Another, more technical reason why IPO pop happens is that after initial hours of uptick many other hedge funds join the trend and drive the stock price even higher. Experienced traders know about this phenomenon very well. But the investors who drive the price abnormally high at the end of first day, might not be right investors to allocate stocks to during IPO. Many of them will even refuse to buy anything at IPO because they will join the party only if initial “pop” happens. When you are pricing your stocks at IPO, you are doing it based on investor feedback who give you indication and necessary volume to buy at IPO, and you can’t control what happens after that. This phenomenon again underlines the first point that transitioning to public markets is a risky step with lots of unknowns.

Third: higher price at IPO is not necessarily better for the company.

Good IPO performance is very important for the companies as at the end of the year they want to talk to happy shareholders at AGM. Poorly performing IPO costs much more to the company in the medium to long-term as they will have constant pressure from shareholders to fix immediate share price. Shareholders will demand mostly to cut costs, rather than to invest in innovation and other long-term projects. I have participated in an IPO where the company itself was pushing for underpricing in order to secure the “pop” and have lots of credibility with future shareholders, while investment bankers were actually recommending the higher price.

And Finally: Yes, sometimes abnormally high “pop” happens due to poor price discovery or too much underpricing. And Yes, direct listing is sometimes a viable alternative. But we should not forget about many other subtle factors which play an important role. IPO is a risky transaction and incorporates intertwining of the complex worlds of Corporate Finance, Equity Capital Markets and Trading.



FinTech, Strategy, and Corporate Finance Executive and Adviser

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