The IPO market is beginning to show signs of recovery. While uncertainty hangs over equity markets as a whole, many analysts are taking encouragement from post-IPO pricing well above the initial list. Some anticipate a surge in IPOs as companies proceed with offerings postponed from 2001.
As the market recovers, one common indicator of success that many IPO watchers continue to apply is the increase in share price on the first day of trading. During the 1990s IPO boom, some considered a two-digit increase to be the measure of IPO success. Others drew a benchmark from so-called daily doublers, or IPOs that doubled their share price on day one. True, an argument can be made that some measure of underpricing is appropriate compensation for first-round investors who face levels of risk that they would not face for secondary offerings.1 But even then, from the perspective of issuing shareholders, an excessive first-day jump should be viewed as a measure of the mispricing and failure of an IPO, rather than as a measure of its success.
No question, extremes such as Theglobe.com's November 1998 IPO, with first day returns over 300 percent, helped to firmly establish an industry norm of significant...