WSJ: Poor Debuts May Mark A Potential Softening

Professor Kent Womack via The Wall Street Journal about the trend of poor IPO debuts remaining underperformers for months to come, with only few of them managing to rise above their IPO prices.

A study published in the Journal of Finance in 1999 found new stocks that have a cold start -- they fail to close above their IPO price on their first day of trading -- decline on average an additional 12% over the next year.

"You may find that some proportion of these deals that go badly at first do in fact turn around. But, on average, the result is that you probably are looking at dead money for quite a while," says Kent Womack, a professor of finance at the Tuck School at Dartmouth College, who co-wrote the paper.

"I think when you see a stock that goes down that much initially, it says a large portion of the early investors were not committed to the deal," says Prof. Womack, who worked as an investment banker and institutional salesman at Goldman Sachs in the 1980s. "And everybody who is still in it is going to say to themselves, 'I ought to think a lot harder about what I own here.' "

Source: Wall Street Journal by Lynn Cowan June 12, 2006