Busted Ipos and Windows of Misopportunity

After the first day of public trading, the long run return performance of initial public offerings ('IPOs') is poor relative to a sample of matching firms. We provide evidence from a large sample of IPOs during 1988-1995 in support of the theory that failure rates are inefficiently priced during the going public process. During the sample period, all of the poor long run performance of IPO firms is accounted for by a relatively small number of issuers subsequently delisted for reasons related to poor operating performance ('busted' IPOs). Investment banks establish offer prices at a level that fails to compensate investors for the likelihood and costs of financial distress. Investors are insufficiently pessimistic about the business prospects of some IPOs, and apparently purchase shares assuming all new issues will survive