SAFT-ON-WEALTH-The downward spiral of IPO generations

Wed May 25, 2016 5:14pm EDT
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(James Saft is a Reuters columnist. The opinions expressed are his own.)

By James Saft

May 25 (Reuters) - Initial public offerings are getting riskier and riskier, with increased volatility in earnings and share prices.

This is not only bad news for investors in IPOs, but may also have significant repercussions on equities generally.

Studies over the past decade have shown that successive generations of IPOs through the decades are performing worse; they grow more quickly than their forebears but with greater volatility and more failures.

A recent study finds that this reflects heightened competition as the world has moved away from simply making things and pivoted toward producing higher-valued goods or services, but in much more competitive areas.

"Firms from successive cohorts (of IPOs) enter more knowledge-intensive industries. Even within the same industries, successive cohorts use higher levels of intangible inputs," Anup Srivastava of Dartmouth College and Senyo Tse of Texas A&M write in the study. "Furthermore, new cohorts operate in product markets characterized by higher uncertainty and competition." (here)

In part, this is nothing more than the flipside of the globalization of manufacturing jobs to cheaper offshore locations. That move away from commodity-type manufacturing leaves U.S. companies to compete in areas with more intangible inputs. When you compete on the strength of your talent, of your technology and of your research and development, you are subject to much higher volatility in the market than companies from an earlier era.

That's clearly reflected in the performance of IPO cohorts as documented in the study. Firms listed in the 2000s show share price volatility higher than those listed in the 1990s, 1980s, 1970s or before 1970. Earnings volatility is also much higher; for example, about 10 times higher for firms that went public in the last decade vs those that went public before 1970.   Continued...