Misconceptions about IPO pop

Matt Levine, from Money Stuff newsletter, covers a major misconception about how companies that go public via Initial Public Offerings, leave money on the table when their stock goes up on their first day of trading.

He quotes a paper How much money is really left on the table? Reassessing the measurement of IPO underpricing

IPO issuers are thought to collectively leave billions of dollars “on the table” by underpricing shares relative to the initial trading price. However, this trading price corresponds to relatively small share volume. Because some investors are more optimistic about the shares’ value than others, the trading price exaggerates the maximum feasible IPO price for the larger IPO quantity. We assess the extent of the mismeasurement by introducing a new measure of underpricing that incorporates both share prices and their associated quantities. Using data from 2,937 IPOs from 1993-2023, our evidence suggests that IPOs are underpriced by substantially less than is commonly believed, perhaps up to 40% less.