When initial offerings fizzle out, small investors can get burned

May 30, 1993|By Knight-Ridder News Service

A private corporation you've been watching just went public. Should you rush out immediately to buy its stock?

Probably not, says Roni Michaely, a finance professor at Cornell University. Most initial public offerings (IPOs) don't fare too well during the first two years.

Mr. Michaely based that conclusion on a five-year study that examined the IPOs of 947 firms in various industries, including agriculture, services, manufacturing and mineral production.

IPOs can be a good deal for institutional investors, which can commit to new offerings ahead of the masses by agreeing in advance to buy a block of shares at the initial offering price. They often reap a 10 percent increase in value on the opening day.

"For example, a firm comes out with a value of $13 per share and the first day goes to $16," Mr. Michaely said. "Research shows that, on average, that $16 share will sell for $12 in two years."

Mr. Michaely's bottom line: "I would not recommend for any investor to hold new issues [during] . . . the first three years after they come to the market; they don't perform so well."

As stock prices reach new highs, many investors are growing nervous, according to a survey by Prudential Securities.

When 400 active investors were polled, almost one-third agreed that the stock market had gotten too risky. (Active investors were defined as people with a least one brokerage account and an annual household income over $500,000.)

Despite the pessimism, 92 percent said they still believed stocks are the best long-term investment.

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