Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionVI. Cost of Capital and
Long−Term Financial
Policy(^564) 16. Raising Capital © The McGraw−Hill
Companies, 2002
and the amount of underpricing was actually very small or even negative for much of
that time. Underpricing in the 1980s ran about 6.9 percent. Finally, for 1990–99, IPOs
were underpriced by 20.9 percent on average.
From Figure 16.3, it is apparent that the number of IPOs is also highly variable
through time. Further, there are pronounced cycles in both the degree of underpricing
and the number of IPOs. Comparing Figures 16.2 and 16.3, we see that increases in the
number of new offerings tend to follow periods of significant underpricing by roughly
6 months. This probably occurs because companies decide to go public when they per-
ceive that the market is highly receptive to new issues.
Table 16.2 contains a year-by-year summary of underpricing for the years 1975–2000.
As indicated, a grand total of 6,974 companies were included in this analysis. The degree
of underpricing averaged 17.8 percent overall for the 26 years examined. Securities were
overpriced on average in only 1 of the 25 years; in 1975, the average decrease in value
was 1.5 percent. At the other extreme, in 1999, the 491 issues were underpriced, on av-
erage, by a remarkable 68.6 percent.
536 PART SIX Cost of Capital and Long-Term Financial Policy
Work the Web
So, do the high returnsIPOs sometimes earn have you excited? Do
you wonder how recent IPOs have performed recently? You can find out
at http://www.bloomberg.com. Simply go to the web site and follow the “IPO
Center” link. We did, and here is the result:
As you can see, Multilink Technology has been an impressive performer to date;
however, several other IPOs, like General Maritime and Fmc Technologies, have not
experienced such good fortune. Look at the ticker symbol REVU (for Princeton Re-
view, provider of the ACT, SAT, and GMAT study courses). The performance to date
has not been good. What do you suppose that says about students studying (or
maybe not studying) for college?
Work the Web