In 1991, Jay R. Ritter published a paper titled The Long-Run Performance of Initial Public Offerings. In this paper, he found that companies performing an initial public offering (IPO) significantly underperform in comparison to companies that have not issued stock over the previous 5 years. It was in this paper that Ritter made the observation that the first 6 months after IPO and SEO had the closest performance with their matching non-offering firms. This led me to several questions. First, since it has been over 25 years since this research was performed, is this phenomenon still relevant? Second, if this phenomenon is still relevant, does the first 6-month performance after IPO still align with matching firms? Third, if this phenomenon is still relevant, is there a potential arbitrage opportunity for short-term investors?
In this paper, I show that this phenomenon of underperformance is still relevant today for initial public offerings within the technology sector. Additionally, I show that the 6-month performance for IPOs no longer aligns with matching firm performance. The mean performance of companies performing IPOs is significantly less than their matching firms. The average 6-month return of IPO companies was -8.43%, versus an average return of 16.46% for matching firms within the same industry and an average return of 24.22% for matching firms in different industries. Finally, I discuss the potential arbitrage opportunity for short-term investors looking to capitalize on this performance disparity.