The IPO Radar

IPOs are systematically priced below where the market clears on day one. On Jay Ritter's long-run US series, first-day returns since 1980 have averaged roughly 19% with a median nearer 7% — a persistent gap that has survived four decades, multiple market regimes, and repeated attempts to design it away.

The gap between that mean and that median is itself the point: a minority of very large pops pulls the average well above the typical deal.

What that figure counts. Traditional operating-company IPOs on US exchanges, firm-commitment underwritten, measured offer-to-close on the first day and equal-weighted. It excludes SPACs, Regulation A offerings, direct listings, closed-end funds, REITs and uplistings — each of which we track separately, because merging them produces a number that describes no market. Source: Jay R. Ritter, University of Florida. Our own conventions are in methodology.

There is no single explanation, and the competing ones are not mutually exclusive. What follows is the honest state of the argument, plus what the pattern costs the companies going public.

First, what does "pop" actually mean?

Three different calculations get called the pop, and they diverge sharply on volatile debuts:

Metric	Formula
Offer-to-open	(first trade − offer) / offer
Offer-to-close	(first-day close − offer) / offer
Open-to-close	(close − first trade) / first trade

Offer-to-close is the academic standard and our default. It is also, importantly, not a return most investors can earn — it requires having received an allocation at the offer price. A retail buyer entering at the open experiences the third number, which is frequently much smaller and sometimes negative.

See Offer price vs. opening price.

Explanation 1: the winner's curse

The oldest formal account, from Kevin Rock's work in the 1980s.

Imagine two kinds of investor: informed ones who can tell good deals from bad, and uninformed ones who can't. Informed investors bid only for the deals they think are underpriced. Uninformed investors bid for everything.

The consequence is that an uninformed investor gets a small allocation in the good deals — because informed money crowded in — and a full allocation in the bad ones, because nobody else wanted them. Their average outcome is worse than the average IPO, purely from the allocation mechanics.

If that's true, uninformed investors eventually stop participating, and the market needs them. So IPOs must be underpriced enough on average to leave uninformed investors with an acceptable expected return despite the adverse allocation. The pop is the price of keeping them in the room.

What it explains well: why underpricing persists rather than being competed away, and why it's larger for deals where information is scarcer.

What it explains less well: pops of 200% or more, which are far larger than any plausible compensation for allocation bias.

Explanation 2: paying investors to reveal what they know

This is the bookbuilding account, associated with Benveniste and Spindt.

The whole point of bookbuilding is that underwriters don't know what the company is worth — they're trying to find out. The investors who know most are institutions that follow the sector closely. Those investors have no reason to reveal genuine enthusiasm, because doing so raises the price they pay.

So underwriters offer a trade: tell us honestly what you think it's worth, and we'll price below that and give you a favourable allocation. The pop is the payment for honest information.

What it explains well: why deals with strong indications get priced below what those indications would support, rather than at them. It also predicts something observable and confirmed — that deals revised upward during bookbuilding tend to pop more, not less, which is the opposite of what a simple supply-and-demand story would suggest.

What it implies: some underpricing is a genuine cost of price discovery, not a failure.

Explanation 3: the underwriters' incentives aren't the issuer's

The uncomfortable one.

Underwriters are paid a percentage of proceeds, so in principle they want a high price. But they also have relationships with the institutional investors who receive allocations, and those relationships generate ongoing trading business. A deal that pops makes those clients money.

A bank that consistently delivers underpriced allocations to favoured clients is building something valuable — to the bank. The issuer pays for it once, on the day it goes public.

The extreme version of this was documented after the dot-com era, when allocations were found to have been directed in exchange for inflated commissions on other trades, and in some cases to executives at companies that might award future banking mandates. Regulatory settlements followed. The practices were curtailed; the underlying incentive structure was not eliminated, because it can't be.

What it explains well: why the pop persists despite issuers plainly disliking it, and why a handful of companies have tried alternative mechanisms.

See IPO allocation.

Explanation 4: the float is small

Structural, and often the largest single factor in the extreme cases.

Most IPOs sell a modest fraction of shares outstanding. Demand at the open comes from everyone who was not allocated — a much larger pool than the one that participated in the offering — meeting a deliberately limited supply.

The most spectacular first-day gains in history share this feature. The dot-com era records were all tiny floats meeting enormous retail enthusiasm. The pattern recurs whenever a highly visible company sells a small slice of itself.

This is less an explanation of underpricing than of the size of the gap. The offer price can be a reasonable estimate of long-run value and the open can still clear far above it, because the open is pricing a scarce asset rather than the whole company.

See Public float.

Explanation 5: everyone is watching everyone else

Information cascades. Investors can observe that a deal is oversubscribed but cannot observe why. Interest becomes self-reinforcing, because participating looks safer when others are participating.

Underwriters have an interest in starting that cascade, which means building early momentum in the book — which means pricing attractively enough for the first movers to commit.

What it explains well: the bimodal quality of IPO outcomes. Deals tend to be either well covered or struggling, with less in between than you'd expect.

Explanation 6: litigation and reputation insurance

A stock that falls below its offer price creates unhappy investors and, in the US, a well-developed plaintiffs' bar. Section 11 of the Securities Act imposes liability for material misstatements in the registration statement, and a broken deal is the circumstance in which someone goes looking for one.

Pricing conservatively reduces that exposure. It also protects the underwriter's reputation with the investors it will need for the next deal.

How much it explains: probably modest as a primary driver, but it operates in the same direction as everything else, and there is no countervailing force pushing underwriters to price aggressively.

See Section 11 liability.

What does the pop cost the company?

We express it as money left on the table: (first-day close − offer price) × shares sold at the offer price.

Across the 1980–2025 US sample the aggregate runs to hundreds of billions of dollars. On individual deals it routinely exceeds the underwriting fee by a wide margin. Figma priced at $33 in July 2025 and closed its first day at $115.50 — a first-day gain of roughly 250%, and on a large offering, an enormous sum of foregone proceeds.

Two caveats, both important.

First, this is descriptive, not counterfactual. Pricing at the closing level would have changed the demand that produced that close. The company could not simply have priced at $115.50 and sold the same shares.

Second, not everyone regards it as a pure loss. The arguments on the other side: a strong debut generates attention and goodwill; it builds a shareholder base disposed to participate in later offerings; and for founders retaining the great majority of their shares, a higher trading price on a small float may matter more than proceeds on the slice sold.

Those arguments are real. They are also, conveniently, the arguments made by the people who benefit from the pop.

See How much does an IPO cost?.

If the pop is a cost, why doesn't anyone fix it?

Some have tried.

Dutch auctions let investors bid price and quantity, setting a clearing price directly. Google used a modified version in 2004. The method has never caught on — it reduces the pop that institutional investors value, which makes it harder to build a book, and bankers have little reason to promote it.

Direct listings skip the underwritten allocation entirely, letting the opening auction set the price. Spotify in 2018, Slack in 2019, Palantir and Asana in 2020, Coinbase in 2021. Exchange rules now also permit direct listings that raise primary capital. This genuinely eliminates offer-to-open underpricing, because there is no offer price. It is available mainly to companies well-known enough not to need the marketing an underwritten deal provides.

The persistent obstacle is that the parties who could change the mechanism are not the parties who bear the cost. Issuers go public once. Underwriters and institutional investors transact continuously, and both benefit from the status quo.

See Dutch auction IPO · IPO vs. direct listing.

Does a big pop mean the IPO was a good investment?

For the allocated investor on day one, obviously. For anyone buying afterwards, it's a much weaker signal than it appears.

A large first-day gain tells you demand exceeded a restricted supply on one morning. It does not tell you what the business is worth. Several of the largest first-day gains in history were followed by severe declines, and the academic literature on long-run IPO performance is, at best, unflattering.

The practical point: the pop is a feature of the offering mechanism, not a verdict on the company. Conflating the two is the most common error in reading IPO coverage.

See Are IPOs good investments?.

Quick answers

What's the average IPO first-day return? Roughly 19% on average since 1980, median nearer 7%, on Ritter's US series.

Do all IPOs pop? No. A meaningful share trade below their offer price on day one, which is called breaking issue.

Can I capture the pop? Only with an allocation at the offer price, which most retail investors don't receive.

Is underpricing deliberate? Partly. Some is the cost of price discovery; some reflects incentives that don't favour the issuer.

Which country has the highest underpricing? It varies enormously by market and era, driven by allocation rules and pricing method. Markets with fixed-price offerings and retail quotas have historically shown far higher average first-day returns than the US.

Does the pop hurt the company? It represents proceeds the company didn't receive. Whether that's a net cost depends on what you think the attention and goodwill are worth.

Offer price vs. opening price · IPO underpricing · How is an IPO priced? · IPO allocation · IPO first-day returns data · Dutch auction IPO

Sources

Jay R. Ritter, University of Florida — IPO datasets on first-day returns and money left on the table
Rock, "Why New Issues Are Underpriced," Journal of Financial Economics
Benveniste and Spindt, on bookbuilding and information revelation
Loughran, Ritter and Rydqvist — international underpricing evidence
Securities Act Section 11
NYSE and Nasdaq IPO auction materials
The IPO Radar filing database — Methodology