Jay Ritter

• PhD
• Professor at University of Florida

After two decades of low initial public offering (IPO) activity and a number of regulatory changes, the number of IPOs of both operating companies and special purpose acquisition companies (SPACs) boomed in the United States in 2021 before collapsing in 2022. In recent years, surging valuations have resulted in many private companies achieving “uni...

Going public by merging with a Special Purpose Acquisition Company (SPAC) is much more expensive than conducting a traditional IPO. We rationalize why some companies merge with a SPAC by listing the potential benefits. We analyze the agency problems that certain SPAC features address. SPAC IPO investors and deal sponsors have earned remarkably high...

This article provides a survey of China’s initial public offering (IPO) market, focusing on IPO pricing, bids and allocation, and aftermarket trading. We show that strict regulations result in suppressed IPO offer prices and high initial returns, causing a high cost of going public. Investors treat IPOs as lotteries with extremely high short-term r...

More frequent, larger, and more recent debt and equity issues in the prior 3 fiscal years are followed by lower stock returns in the subsequent year. The intercept of a q -factor calendar-time regression for the value-weighted (VW) portfolio of firms with at least 3 large issues is −0.63% per month ( t- stat. = −4.31). Purging the factor returns of...

Given their actual revenue and spending, most net equity issuers and an overwhelming majority of net debt issuers would face immediate cash depletion without external financing. Debt issuers tend to have short-lived cash needs, while equity issuers often have persistent cash needs. On average, debt issuers immediately spend almost all of the procee...

In the capital structure literature, speed of adjustment (SOA) estimates are similar whether book or market leverage is used. This robustness is suspect, given the survey evidence that firms target their book leverage and the empirical evidence that they don’t issue securities to offset market leverage changes caused by stock price changes. We show...

Studying the only mandatory pre-IPO market in the world—Taiwan’s Emerging Stock Market (ESM)—we document that pre-market prices are very informative about post-market prices and that informativeness increases with a stock’s liquidity. The ESM price-earnings ratio shortly before an initial public offering explains about 90% of the variation in the o...

The Financial Economists Roundtable, a group of distinguished senior financial economists, discusses current issues and future developments in the crowdfunding market and offers suggestions regarding the regulation of the industry.

A popular view is that private equity (PE) firms tend to expropriate other stakeholders of their portfolio companies. Bonds offered during 1992-2011 by companies after their initial public offerings (IPOs) do not reflect this view. We find that yield spreads on bonds offered by PE-backed companies are, on average, 70 basis points lower, holding oth...

Immediate cash needs are the primary motive for net debt issuances and a highly important motive for net equity issuances. Net debt issuers immediately spend almost all of the proceeds, but net equity issuers save most of the proceeds. Conditional on issuing a security, corporate lifecycle, precautionary saving, market timing, and static tradeoff t...

Growth capital investing is the financing of growing businesses that are investing in tangible assets and the acquisition of other companies. Growth capital is common in retailing, restaurant chains, and health care management, and represents 12% of all venture capital (VC)-backed initial public offerings (IPOs). Since 1980, investing in growth cap...

The Financial Economists Roundtable, a group of distinguished senior financial economists, discusses the proposal to tax financial transactions. They highlight the benefits of financial transactions and the potential costs and issues of taxing them.

By studying the only mandatory pre-IPO market in the world – Taiwan’s Emerging Stock Market (ESM), we document that pre-market prices are very informative about post-market prices and that the informativeness increases with a stock’s liquidity. The ESM price-earnings ratio shortly before the initial public offering explains about 90% of the variati...

for helpful comments on earlier drafts. The views expressed in this paper are those of the authors= and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.

A popular view is that private equity firms (buyout groups) are focused on short-term improvements at the expense of long-term value creation. Bonds offered during 1992-2011 by companies after their initial public offerings (IPOs) do not reflect this view. We find that yield spreads on bonds offered by private equity-backed companies are on average...

We study the effect of patents as a proxy for innovation on the long-run performance of Venture Capital (VC)-backed initial public offerings (IPOs). VC-backed IPOs with successful patent filings prior to the IPO substantially outperform those without patent filings, with 3-year buy-and-hold market-adjusted returns of -4.5% vs. -27.1%. On average, V...

During 1980-2000, an average of 310 companies per year went public in the U.S. Since the technology bubble burst in 2000, the average has been only 99 initial public offerings (IPOs) per year, with the drop especially precipitous among small firms. Many have blamed the Sarbanes-Oxley Act of 2002 and the 2003 Global Settlement’s effects on analyst c...

I address why IPO volume, and especially small company IPO volume, has been so depressed for more than a decade. The conventional wisdom is that the main culprits are a combination of heavy-handed regulation, especially the Sarbanes-Oxley Act of 2002, a decline in analyst coverage of small firms, and lower stock prices since the 2000 technology bub...

Initial public offering (IPO) activity in Europe has recently come to a near-halt and, similarly to the US, this decline has been more pronounced among small firm IPOs. Three alternative explanations have been proposed: the economies of scope hypothesis states that getting big fast has become more important, resulting in small firms being acquired;...

When measured over long periods of time, the correlation of countries' inflation‐adjusted per capita GDP growth and stock returns is negative. This result holds for both developed countries (for which the correlation coefficient is –0.39 using data from 1900–2011) and emerging markets (the correlation is –0.41 over the period 1988–2011). And this m...

There is significant concern among policymakers about the health of the Initial Public Offering (IPO) market. From 1980–2000, an average of 298 domestic operating companies went public in the United States each year, but from 2001–2011, the number of new listings fell to an average of only ninety per year. Despite the acknowledged importance of sto...

European stock exchanges have repeatedly opened second markets to list small companies. We explain the motivation for the creation of these second markets, and the reasons why many of them have failed. We find that the average long-run performance of initial public offerings (IPOs) on second markets is dramatically worse than for main market IPOs....

In this review, I criticize the ability of popular asymmetric information-based models to explain the magnitude of the underpricing of initial public offerings (IPOs) that is observed. I suggest that the quantitative magnitude of underpricing can be explained with a market structure in which underwriters want to underprice excessively, issuers are...

In this survey, I criticize the ability of popular asymmetric information-based models to explain the magnitude of the underpricing of initial public offerings (IPOs) that is observed. I suggest that the quantitative magnitude of underpricing can be explained with a market structure in which underwriters want to underprice excessively, issuers are...

We develop a theory of initial public offering (IPO) underpricing based on differentiated underwriting services and localized competition. Even though a large number of investment banks compete for IPOs, if issuers care about non-price dimensions of underwriting, then the industry structure is best characterized as a series of local oligopolies. We...

Using a sample of fifty-six companies going public in 1996--2000 in which top executives received allocations of other hot initial public offerings (IPOs) from the bookrunner, a practice known as spinning, we examine the consequences of spinning. The fifty-six IPOs had first-day returns that were, on average, 23% higher than similar IPOs. The profi...

This paper examines time series patterns of external financing decisions and shows that publicly traded U.S. firms fund a much larger proportion of their financing deficit with external equity when the cost of equity capital is low. The historical values of the cost of equity capital have long-lasting effects on firms' capital structures through th...

This paper examines time-series patterns of external financing decisions and shows that publicly traded U.S. firms fund a much larger proportion of their financing deficit with external equity when the cost of equity capital is low. The historical values of the cost of equity capital have long-lasting effects on firms' capital structures through th...

During popular prime-time television shows, forensic investigators use specialized but wide-ranging scientific knowledge of chemical trace evidence, bacteria, DNA, teeth, insects, and other specialties to collect and sift evidence of possible crimes. In economics and finance, forensic investigators apply their own specialized knowledge of prices, q...

In an accelerated seasoned equity offering (SEO), an issuer foregoes the investment bank's marketing efforts in return for a lower fee. To explain why many issuing firms choose a higher cost fully marketed offer, we posit that the marketing effort flattens the issuer's short-run demand curve. Alternatively stated, with a fully marketed offer, the i...

We examine over 7400 analyst recommendations made in the year after going public for IPOs from 1999 to 2000. Initiations of coverage at the end of the quiet period come almost exclusively from affiliated analysts, whereas initiations afterward are predominantly from unaffiliated analysts. Contrary to previous findings, we find no evidence that the...

Using a sample of 56 companies going public in 1996-2000 in which top executives received hot initial public offering (IPO) allocations from the bookrunner, we examine the consequences of this bribery. These IPOs had first-day returns that were, on average, 18% higher than similar IPOs. The profits collected by these executives were only a small fr...

In the last decade, there has been a dramatic change in syndicate structure for Initial Public Offerings (IPOs), with the frequency of multiple bookrunners increasing from zero to over 50 percent. We posit that the primary benefit of multiple bookrunners to an issuer is improved bargaining power with regard to the offer price. This is reflected in...

Data on U.S. mergers and aquisitions from 1987 to 2006 indicate that firms with high market-to-book values (i.e., Tobin's Q) tend to merge with firms that have lower Q's, but that target Q's are on average higher than those of firms not involved in mergers at all. We capture this fact with a model in which the ratio of a bidder's Q to that of a pro...

Underwriters using bookbuilding can allocate shares of initial public offerings (IPOs) on the basis of, among other things, commissions paid by investors. In testing the hypothesis that investors trade liquid stocks in order to affect their IPO allocations, we find that money left on the table by IPOs is related to the trading volume of the 50 most...

We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 fi...

Underwriters using bookbuilding have discretionary power for allocating shares of initial public offerings (IPOs). This paper focuses on whether commission generation is a factor in IPO allocation. We use the trading volume of highly liquid stocks to capture trading that is used to generate commissions for underwriters. We find that money left on t...

It is widely believed that economic growth is good for stockholders. However, the cross-country correlation of real stock returns and per capita GDP growth over 1900–2002 is negative. Economic growth occurs from high personal savings rates and increased labor force participation, and from technological change. If increases in capital and labor inpu...

Newly public companies are subject to a "quiet period" restricting insiders and affiliated underwriters from issuing earnings forecasts and research reports regarding the firm for a specified period following the initial public offering (IPO). As soon as this quiet period ends, the analysts of managing underwriters typically initiate research cover...

In the 1980s, the average first-day return on initial public offerings (IPOs) was 7%. The average first-day return doubled to almost 15% during 1990-1998, before jumping to 65% during the internet bubble years of 1999-2000 and then reverting to 12% during 2001-2003. We attribute much of the higher underpricing during the bubble period to a changing...

Real estate data are often characterized by data irregularities: missing data, censoring or truncation, measurement error, etc. Practitioners often discard missing- or censored-data cases and ignore measurement error. We argue here that an attractive remedy for these irregularity problems is simulation-based model fitting using the Gibbs sampler. T...

This chapter analyzes the securities issuance process, focusing on initial public offerings (IPOs) and seasoned equity offerings (SEOs). The IPO literature documents three empirical patterns: 1) short-run underpricing; 2) long-run underperformance (although this is contentious); and 3) extreme time-series fluctuations in volume and underpricing. Wh...

This brief survey discusses recent developments in the European initial public offering (IPO) market. The spectacular rise and fall of the Euro NM markets and the growth of bookbuilding as a procedure for pricing and allocating IPOs are two important patterns. Gross spreads are lower and less clustered than in the USA. Unlike the USA, som...

OF ARTICLE This paper discusses evidence on the short-run and long-run performance of companies going public in many countries. Differences in average initial returns are analyzed in terms of binding regulations, contractual mechanisms, and the characteristics of the firms going public. The evidence suggests that the move in recent years by most Ea...

This article provides a brief introduction to behavioral finance. Behavioral finance encompasses research that drops the traditional assumptions of expected utility maximization with rational investors in efficient markets. The two building blocks of behavioral finance are cognitive psychology (how people think) and the limits to arbitrage (when ma...

We examine the expiration of the IPO quiet period, which occurs after the 25-super-th calendar day following the offering. For IPOs during 1996 to 2000, we find that analyst coverage is initiated immediately for 76 percent of these firms, almost always with a favorable rating. Initiated firms experience a five-day abnormal return of 4.1 percent ver...

If stocks were severely undervalued in the late 1970s and early 1980s, then the bull market starting in 1982 was partly just a correction to more normal valuation levels. This paper tests the hypothesis that investors suffer from inflation illusion, resulting in the undervaluation of equities in the presence of inflation, with levered firms being u...

We review the theory and evidence on IPO activity: why firms go public, why they reward first-day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective on the literature is three-fold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is t...

One of the puzzles regarding initial public offerings (IPOs) is that issuers rarely get upset about leaving substantial amounts of money on the table, defined as the number of shares sold times the difference between the first-day closing market price and the offer price. The average IPO leaves $9.1 million on the table. This number is approximatel...

Every MBA program that I have taught in has some Asian students, and in some Asian societies, such as Korea, it is common for a student to give a gift to a teacher at the end of the year. Some Korean students continue this practice when they are students in the U.S., and over the years I have received a number of gifts from students. Most of these...

The presence of venture capital in the ownership structure of U.S. firms going public has been associated with both improved long-term performance and superior “certification” at the time of the initial public offerings (IPOs). Many of the major venture capital firms in Japan are subsidiaries of securities firms that may face a conflict of interest...

Gross spreads received by underwriters on initial public offerings (IPOs) in the United States are much higher than in other countries. Furthermore, in recent years more than 90 percent of deals raising $20-80 million have spreads of exactly seven percent, three times the proportion of a decade earlier. Investment bankers readily admit that the IPO...

Defenders of market efficiency argue that anomalies involving long-term abnormal returns are not robust to alternative methodologies. We argue that because various methodologies use different weighting schemes, the magnitude of abnormal returns should differ, and in a predictable manner. Three problems are identified that cause low power in value-w...

The use of accounting information in conjunction with comparable firm multiples is widely recommended for valuing initial public offerings (IPOs). We find that the price–earnings (P/E), market-to-book, and price-to-sales multiples of comparable firms have only modest predictive ability without further adjustments. This is largely due to the wide va...

: Recent studies have documented that firms conducting seasoned equity offerings have inordinately low stock returns during the five years after the offering, following a sharp run-up in the year prior to the offering. This paper documents that the operating performance of issuing firms shows substantial improvement prior to the offering, but then...

Conrad and Kaul (1993) report that most of De Bondt and Thaler's (1985) long-term overreaction findings can be attributed to a combination of bid-ask effects when monthly cumulative average returns (CARs) are used, and price, rather than prior returns. In direct tests, we find little difference in test-period returns whether CARs or buy-and-hold re...

We report the average costs of raising external debt and equity capital for U.S. corporations from 1990 to 1994. For initial public offerings (IPOs) of equity, the direct costs average 11.0 percent of the proceeds. For seasoned equity offerings (SEOs), the direct costs average 7.1 percent. For convertible bonds, the direct costs average 3.8 percent...

Because initial public offerings (IPO) involve the sale of securities in closely-held firms in which some of the existing shareholders may possessnonpublic information, some of the classic problems caused by asymmetric information may be present. This chapter describes some of the mechanisms that are used in practice to overcome the problems create...

Companies issuing stock during 1970 to 1990, whether an initial public offering or a seasoned equity offering, have been poor long-run investments for investors. During the five years after the issue, investors have received average returns of only 5 percent per year for companies going public and only 7 percent per year for companies conducting a...

This paper discusses evidence on the short-run and long-run performance of companies going public in many countries. Differences in average initial returns are analyzed in terms of binding regulations, contractual mechanisms, and the characteristics of the firms going public. The evidence suggests that the move in recent years by most East Asian co...

In the 1990s, thousands of firms have gone public around the world. This article surveys the market for initial public offerings (IPOs). The process of going public is discussed, with particular emphasis on how contractual mechanisms deal with potential conflicts of interest. The valuation of IPOs, bookbuilding, price stabilization, and the costs o...

A highly controversial issue in financial economies is whether stocks overreact. In this paper we find an economically-important overreaction effect even after adjusting for size and beta. In portfolios formed on the basis of prior five-year returns, extreme prior losers outperform extreme prior winners by 5–10% per year during the subsequent five...

The underpricing of initial public offerings that has been widely documented appears to be a short-run phenomenon. Issuing firms during 1975-84 substantially underperformed a sample of matching firms from the closing price on the first day of public trading to their three-year anniversaries. There is substantial variation in the under performance y...

This paper finds that, for the 1935–1986 period, the market's risk‐return relation does not have a January seasonal. The findings differ from those of other studies due to the use of value‐weighted, rather than equally weighted, portfolios. Inferences are sensitive to the weighting procedure because of the small‐firm return patterns in January. In...

The average returns on low‐capitalization stocks are unusually high relative to those on large‐capitalization stocks in early January, a phenomenon known as the turn‐of‐the‐year effect. This paper finds that the ratio of stock purchases to sales by individual investors displays a seasonal pattern, with individuals having a below‐normal buy/sell rat...

Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal r...

This paper develops and tests two propositions. We demonstrate that there is a monotone relation between the (expected) underpricing of an initial public offering and the uncertainty of investors regarding its value. We also argue that the resulting underpricing equilibrium is enforced by investment bankers, who have reputation capital at stake. An...