Why do IPO shares often fall after listing?Medium

Because two dates arrive that have nothing to do with the business: the day the stabilisation stops, and the day the insiders are allowed to sell.

2 min read · 391 words

A listing that trades up on day one and drifts down over the following months is a common pattern, and most of it is mechanical. Four things happen on a schedule.

One: the support has an end date

For a limited period after listing, the bank running the offer is permitted to buy shares to steady the price. This is disclosed, it is time-limited, and it is bounded in size by the over-allotment option.

When that period ends, so does the buying. Nothing has changed about the company; a buyer has simply stopped.

Two: the lock-up expires

Founders, employees and early investors normally agree not to sell for a set period — ninety or a hundred and eighty days is the convention. Everybody knows the date.

When it passes, shares that could not be sold can be. The selling that follows is not a judgement about the company; it is people who have held an illiquid position for years finally able to diversify. The price move around it is regularly reported as a signal, and it usually is not one.

Three: the register has not settled

Allocations go partly to accounts that intend to hold and partly to accounts that intend to sell into strength. It takes months for the shares to reach holders who want them at the current price, and until then supply arrives from people who were never long-term owners.

Index inclusion pulls the other way, and it is also a date: passing a free float or liquidity threshold turns a block of buying into something that must happen. Which of the two arrives first shapes the first year.

Four: the first results are measured against a forecast

The company has spent months describing its plan to investors. The first set of published results is the first time anybody can check it, and the bar has been set by the company itself.

What this does not tell you

None of the four is information about whether the business is doing well. They are supply, and supply arriving on known dates.

The one that is information is the pricing decision itself: whether the range was raised, and whether the deal size was increased, both of which are published. A deal that raised both has less cushion, and a well-documented 2012 listing is the case study on exactly that.