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Why do IPOs of firms tend to perform poorly over a period of a year or...

Why do IPOs of firms tend to perform poorly over a period of a year or longer?

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Answer #1

the IPO'S when issued in the market are generally overpriced. as a result over the long run the prices fall as the stocks have to correct itself owning to the high prices it was trading at the time of issue.

the underpricing in the long run and also be associated with the firm specific risks, and the information asymmetry between the issuer and the investor.the people working with the firm would artificially inflate the prices at the time of the issue taking the help of window dressing of financial statements . As a result people overpay for these glamour stocks. due to the trend chasing behavior and irrational behavior of investors, they initially buy these overprices stocks, and in the long run the prices corrects itself.

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