Crain News Service
"Flipping" - quickly selling IPO shares back to the underwriter - accounts for 22% to 45% of the dollar volume on the first day an initial public offering trades, a new study shows. The 45% occurs with "cold" issues, IPOs whose prices didn't increase or went down on the first day. The 22% occurs with "hot" issues, those that increased in price at least 10% but less than 60%.
The study - "The Persistence of IPO Mispricing and the Predictive Power of Flipping" - was written by Kent L. Womack, who teaches at Dartmouth College's Amos Tuck School of Business; Laurie Krigman, a professor at the University of Arizona; and Wayne H. Shaw, a professor at Southern Methodist University.
The trio studied the performance of 1,232 new issues from 1988 to 1995. Excluded were the smallest offerings, market values of less than $50 million and prices of less than $8 a share. They also omitted financial companies, such as real estate investment trusts.
The study showed super-hot IPOS - those whose prices jumped more than 60% on first day of trading - are, on average, poor one-year performers. The shares of these IPOs fell a market-adjusted 1.76% in the first year. Cold IPOs fell a market-adjusted 2.1%. In comparison, "warm" IPOs, defined as offerings that increased up to 10% in the first day, saw a one-year, market-adjusted increase of 11.6% and hot IPOs increased by a market-adjusted 22.8% the first year.
"If you look at the stocks that go up by 80% or 100%, most are dogs over the next few years," Mr. Womack said.
"Take, for instance, an offering that's priced at $10 and goes to $20. One could say using a little logic, it's very unlikely (the underwriters) would get it wrong by 100%. They wanted it to go up 10%, not 100% . . . What's happening is retail buyers have heard about the stock through the grapevine and are willing to buy it at any price."
The big run-up is a sign the underwriter priced the issue too low - either in error, or deliberately to ensure the offering would be a blockbuster.
"Flipping is not the demon. The demon is poor pricing by the underwriter," said Mr. Womack.