Are IPOs Overpriced or Underpriced?

This paper examines the short-run performance of the firms that are going public in the US stock market. The analyzed sample consisted of 505 initial public offerings from the beginning of 2018 to the end of 2020. The data was mainly collected from BLOOMBERG, YAHOO FINANCE, and the IPO SCOOP. We found that the average underpricing across the sample turned out to be 25,84% and 125 IPOs had a negative first-day return with an average overpricing of 10,08%. To investigate the dependence of initial returns and 19 independent variables the OLS and GLS regression models were used. The analysis has shown that the age of the company, the sentiment of the investors prior to IPO, the offer risk, and several industries are strongly statistically related to the initial performance of firms that are going public, while the volatility at the IPO date, the volume of the IPO, the proxy of underwriter’s rating, the hot-issue periods appeared to be not significant. These results prove the prediction of the investor sentiment hypothesis, the prediction of ex-ante uncertainty, but a deeper analysis of market timing theory is necessary. Further investigations are suggested in the effect of the hot-market, geography of the issues, and the long-term performance of the companies that are going public. Overall, a greater percentage of IPOs were underpriced rather than overpriced, 71,5% and 25% respectively.