Waiting for the IPO wave

While the U.S. stock market is currently exhibiting many signs of speculative excess, the new issue market remains eerily quiet.[1] Did somebody forget to inform the underwriters and issuers that we’re supposedly in a gigantic AI bubble? Today’s comatose IPO market suggests that actually we’re not in a bubble, at least not yet. Bubbles are characterized by high net equity issuance (I call it the Third Horseman of the Bubble Apocalypse) including IPO waves.

In this piece, I ask two questions. First, where are all the IPOs? I review various proposed explanations for the current dearth of IPOs and find them all unconvincing. Second, if we do experience an IPO wave over the next year, what will that imply?

I start by summarizing the main facts about new issues in general and new issue waves in particular. New issue waves are dramatic events, often involving fraud and corruption, and even physical violence on occasion. We can apply the lessons of past waves to evaluate the much-anticipated IPO wave of 2026/2027.

Overview of IPOs

The process of going public has changed over the centuries. Today, the most common method for going public is to have an IPO. Other current methods include:

• Direct listing. E.g., Palantir in 2020.[2]
• Merger with existing firm or SPAC. E.g., Nikola went public in 2020 via SPAC.

There are many motives for going public, including valuation, capital raising, and liquidity for existing shareholders. Let me start by saying that IPOs are good. That is, IPOs are a desirable component of a dynamic market economy.

However, the main thing you should know about IPOs is that it’s unwise to buy them at the market price. I’d suggest waiting until three years after the IPO before buying shares, because typically they underperform in their first few years as a public company. IPOs, like bananas, need to ripen before they are ready to consume. This fact has been known at least since Stigler (1963), who studied subsequent performance and concluded that:

… it was an unwise man who bought new issues of common stock: he lost about one-fifth of his investment in the first year relative to the market, and another fifth in the years that followed.

This finding has been reproduced in many subsequent studies. The long-term underperformance of new issues reflects the broader pattern that firms are the smart money, and when they’re trading, it’s a bad idea to take the other side.

Take for example Airbnb’s IPO on December 10, 2020. The close price on the first day was $144.71. Three years later, on December 11, 2023, Airbnb’s price had gone nowhere (it was $142.91) while the S&P 500 index had risen more than 25%. Lesson: do not buy IPOs on the first day.

While IPOs underperform on average, they underperform even more after IPO waves. That is, the worst time to buy an IPO is when there are many IPOs hitting the market at the same time. For that reason, Lamont (2002) concludes that it’s better to hold “currency stuffed in a mattress” rather than hold IPOs at market weight.

IPO waves

A wave of new issues is one sign the market is overvalued. New issue waves require both supply (firms willing to go public) and demand (investors willing to purchase new issues). Sometimes, supply goes up for reasons that are unrelated to valuation. For example, many cannabis-related firms listed in various ways on the U.S. and Canadian stock markets in 2018/2019; this wave was a natural result of the increasing legal acceptance of cannabis.

However, you can’t have a new issue wave without demand. We can be sure that if a new issue wave is taking place, investors are willing to buy shares and perhaps are overpaying. And in fact, buying cannabis stocks in 2018/2019 would have been a terrible decision; they’re down more than 70%. While it’s logically possible for an IPO wave to take place in the absence of overpricing, as an empirical matter, waves of IPOs are reliable indicators that the stock market is overvalued. As I’ve previously discussed, we saw waves of new issues during equity bubbles in the 18^th, 19^th, 20^th, and 21^st centuries.

Quantifying IPO waves

If you want to know anything about IPOs, your first stop should be the web page of Professor Jay Ritter of the University of Florida. Here I use his data to describe the history of U.S. IPOs since 1980, looking at common stock of operating companies and omitting penny stocks and SPACs. Here’s the big picture. We saw a huge IPO wave in the 1990s which peaked (in dollar terms) in 1999. We saw a smaller but still significant wave peaking in 2021. In my view, these facts plus other evidence say that we had a big bubble in 2000 and a smaller one in 2021.

How should we measure IPO waves? Using an equal weight approach, you can measure IPO waves by just counting the number of IPOs in a given year. Using a value weight approach, you can measure IPO waves by counting the dollar proceeds or the dollar market cap of the issuing firms. In most situations, value weighting is best.

Figure 1 shows the history of IPOs using an equal weight approach. The solid line shows the raw count of IPOs for every calendar year from 1980 to 2025. The first thing to note about Figure 1 is that in 2025, we saw a pitiful 90 IPOs in the U.S., below the average of 200 IPOs per year and nowhere near the 311 IPOs of 2021 and the 677 IPOs of 1996.[3]

The raw counts in Figure 1 suggest one way to know whether you’re in a bubble: just count how many IPOs occurred last week. If it’s less than five, you’re probably not in a bubble. Baker and Wurgler (2006) use raw IPO count as one input to their stock market sentiment indicator.

A more meaningful method is to normalize IPO count by the total number of common stocks in the prior year, since the number of listed firms in the U.S. changes over time (it peaked at over 7,000 in 1997 and has since fallen to under 4,000 today). The dashed line shows that the 2021 IPO boom was quite sizable relative to the number of listed firms. Using this measure, again we see absolutely no sign of an IPO wave today.

Figure 2 shows a value weight measure of IPO waves. It shows the aggregate dollar value of the market cap of IPO firms by calendar year, as measured at the first day close price. Using only raw dollar numbers (solid line), you could argue that we did see an IPO wave in 2025, because the market cap of issuing firms was about $400B, quite high relative to history. The dashed line shows the more sensible approach of normalizing by the prior year market cap of U.S. common stock. Here we see that normalized IPO value in 2025 was about 1% of total market value, about average for the period 1980-2025, and not near the peak levels of 3% in 2021 and 5% in 1999. An alternative approach would be to use dollar IPO proceeds instead of IPO market cap; this approach also shows no wave today.

So, whether you prefer equal weight or value weight approaches, the normalized numbers in both figures show no wave in 2025.

While we could argue about when exactly the tech stock bubble started, I’d say that we had a frothy market in the mid-1990s, but the market as a whole only got really crazy in 1999/2000. So I view the dashed line in Figure 2 as the best IPO wave measure.

First day pop

One confusing fact about IPOs is that they’re simultaneously overpriced and underpriced on the issue day. Let me explain. The market price on the first day of trading (e.g., the close price of $144.71 for Airbnb) is typically too high, as shown by the fact that shares underperform in subsequent years. But the offer price is typically too low. For example, Airbnb’s offer price was $68, meaning that a lucky few IPO subscribers were able to purchase shares at the offer price and then immediately double their money by selling at the market price. I’ll call this price increase (from $68 to $144.71) the “first day pop”. Ritter reports an average pop of around 19%.

The high average pop reflects a deliberate strategy by issuers and their underwriters to price shares below the expected close price. Why do they do it? Unclear. There are many theories, as discussed by Ritter and Welch (2002). One theory is that underpricing is a form of advertising to gullible retail investors, who are favorably impressed when they observe everyone clamoring to participate in an IPO that then doubles in price.

Figure 1: Number of U.S. IPOs per calendar year, 1980-2025

Figure 2: Total market capitalization of U.S. IPOs by calendar year, 1980-2025

During IPO waves, the average pop increases, with many instances of prices doubling on the first day. Why does the pop rise during IPO waves? Again, unclear; see Ofek and Richardson (2002), Ritter and Welch (2002), Baker and Wurgler (2006), and Baker and Wurgler (2007) for some guesses. One thing’s for sure: somebody somewhere is greatly benefiting from this phenomenon and is able to buy at the offer price and sometimes double their money in a few hours.

Baker and Wurgler (2006) treat the pop as a measure of market exuberance and include it in their index of market sentiment. The wisdom of their approach was confirmed by the stock market bubble of 2020/2021, when the pop rose dramatically.

Fraud, corruption, and violence

When large sums of money are sloshing around, you’re going to have bad behavior. Starting with the South Sea Bubble of 1720, fraudulent new issues have been a central part of equity bubbles, starting with the very word “bubble” itself. The original meaning of “bubble” in Britain in the 1600s meant “con” or “scam.” In 1720, Parliament passed the “Bubble Act” with the goal of preventing new issues and thereby “restraining several extravagant and unwarrantable Practices.”

Turning now to the tech stock bubble, we have hard evidence from SEC investigations that underwriters intentionally misled investors by issuing overly rosy forecasts, such as analysts who privately disparaged companies as worthless while publicly issuing positive recommendations.

The IPO process seems to lend itself to corruption, often involving high government officials and often during new issue waves. In the U.S. in 1934, the Pecora commission found that in the late 1920s, underwriters allocated cheap shares to luminaries such as former president Calvin Coolidge. In 1989, the prime minister of Japan was forced to resign following the Recruit Cosmos scandal, also involving allocation of shares.

Because new issues are perceived as scarce and valuable, there’s often a frenzy to obtain shares, sometimes involving physical crowding, social disorder, and actual riots. Here are some examples:

• In October 1886, the Guinness issue underwritten by Barings was the beginning of a new issue boom for breweries in Britain. “Barings' office was besieged by fighting and clamorous crowds, and it was even necessary to station a special force of police in the street in which it stands.”[4] 
• In August 1992, hundreds of thousands of Chinese citizens flocked to Shenzhen, where: “Investors seeking IPO shares rioted, overturning cars and smashing windows, leading police to use tear gas and fire their guns in the air to quell the disturbance …” [5] One person was reportedly crushed to death.[6]
• In February 2000, approximately 20% of the population of Hong Kong attempted to subscribe to the IPO of tom.com, resulting in crowds, chaotic street scenes, and police involvement.

If we see an IPO boom in 2026/2027, I don’t expect tear gas or gunfire, but anything can happen.

Where are all the IPOs?

Some claim that “the IPO market is broken.” I doubt it’s true, because we saw a wave of IPOs in 2021. If indeed the IPO market is broken, the breakage must have occurred sometime in the past four years.

Many theories, of varying plausibility, have been offered to explain the moribund state of the IPO market. I’ll group them into explanations based on supply and demand. Many of these explanations are discussed in Gao, Ritter, and Zhu (2013).

Supply of new issues:

• The costs of being public have risen due to government red tape.
• There’s no need to go public due to the flowering of private markets.
• New firms are being acquired instead of going public.
• New firms are already profitable and don’t need to raise cash.
• The nature of AI is such that small firms can’t compete and only existing firms can prosper.

Demand for new issues:

• Due to the decline in actively managed funds, the IPO ecosystem has been damaged.
• ETFs, even actively managed ETFs, are ill-suited to handle new issues.

Many of these explanations have some truth, but they’re mostly about the long-term downward trend in the number of IPOs, not about fluctuations around the trend. For example, consider the claim that the Sarbanes-Oxley Act of 2002 raised the regulatory burden on public firms. This claim is true; but it was also true in 2021, so why did we see a wave of IPOs in 2021 but not today?

I’m particularly unimpressed by statements such as “good firms don’t need to go public.” So what? Who said anything about good firms? We’re talking about new issues here. Historically, new issues have been “ridiculous and chimerical.” There was also a shortage of good companies in the 1920s, but that didn’t prevent a wave of new issues. Here’s Graham and Dodd (1934) describing the pattern:

This general lowering of the standards by investment banking firms was due to two causes, the first being the ease with which all issues could be sold, and the second being the scarcity of sound investments to sell.

And consider the new issue boom of 2021. Many electric vehicle companies went public. Were they all good firms? No! Nikola, for example, produced a promotional video featuring a Nikola truck rolling down the highway. What Nikola’s CEO, Trevor Milton, didn’t mention was that the truck could only roll downhill (because it lacked a working engine). Milton was eventually convicted of fraud.

Where are the fraudsters of yesteryear? Has America lost its spunk? Has Wall Street experienced a miraculous spiritual awakening such that its denizens no longer desire to push overpriced issues on a gullible populace?

One explanation for the IPO drought is that the stock market is not overvalued, and therefore there’s no reason to do an IPO. Supporting evidence for this explanation comes from the fact that existing firms are also not issuing equity, but instead are repurchasing.

A different answer to the question “where are all the IPOs” is simply “they’re coming.” I turn to that possibility next.

The coming IPO wave?

According to press reports, SpaceX, OpenAI, and Anthropic may all go public in late 2026. If all three end up going public, what will that imply? Would it constitute an “IPO wave”?

Let’s consider two hypothetical scenarios:

• The Big Three: SpaceX, OpenAI, and Anthropic all go public with a market cap of $1T each.
• Attack of the decacorns: We see 300 IPOs, each having market cap of $10B (a unicorn is a start-up with a valuation of $1B, while a decacorn has $10B).

In both scenarios, we see $3T of market cap entering the public market, so in Figure 2, both would show up as a 1999-sized wave. I’d say either scenario would be a new issue IPO wave. In reality, if the Big Three go public, we’d also probably see hundreds of small fry joining in; the scenarios are not mutually exclusive.

What if only one of the Big Three goes public? That’s not enough to be a wave. For example, in 2019, Saudi Aramco did the world’s largest IPO, but I think this event reflected idiosyncratic motives and said little about broad market valuations.

Here’s the full-blown bubble scenario. In 2026/2027, we observe the Big Three go public along with hundreds of other firms of varying quality. Many of these IPOs double from the offer price to close price on the first day. If these things happen, you’ll know the bubble has arrived. But that’s not necessarily the sign of a market top, because bubbles can last for years.

Stock market bubbles are often heralded by specific IPOs which mark their beginning and not necessarily their end. For the Japanese stock market bubble, the NTT IPO of February 1987 seemed to trigger a retail investor mania; the bubble did not burst until early 1990. For the tech stock bubble, the Netscape IPO of August 1995 was a watershed event; the market peaked more than four years later.

So, if we do see an IPO wave in 2026/2027, hang on to your hat. But right now, while there’s a lot going on in the U.S. stock market, the lack of issuance tells me we are not yet in a stock market bubble.

Endnotes

[1] I thank Suhas Anjaria, Malcolm Baker, Jay Ritter, and D.A. Wallach for helpful conversations on this topic.

[2] References to this and other companies should not be interpreted as recommendations to buy or sell specific securities. Acadian and/or the author of this post may hold positions in one or more securities associated with these companies.

[3] We also saw a wave of SPAC IPOs in 2021; SPACs are not reflected in this data. See Huang, Ritter, and Zhang (2023) for more about SPACs. If you included SPACs in Figure 1, 2021 would look more dramatic.

[4] The Spectator, October 30, 1886.

[5] “China’s Stock Markets: Nearly 25 Years of Wild Swings,” The Wall Street Journal, July 31, 2015.

[6] “China acts to control share fever after riots,” The Independent, August 12, 1992.

References

Baker, Malcolm, and Jeffrey Wurgler. "Investor sentiment and the cross‐section of stock returns." The Journal of Finance 61, no. 4 (2006): 1645-1680.

Baker, Malcolm, and Jeffrey Wurgler. "Investor sentiment in the stock market." Journal of Economic Perspectives 21, no. 2 (2007): 129-151.

Gao, Xiaohui, Jay R. Ritter, and Zhongyan Zhu. "Where have all the IPOs gone?." Journal of Financial and Quantitative Analysis 48, no. 6 (2013): 1663-1692.

Graham, Benjamin, and David L. Dodd. Security analysis: principles and technique. 1934.

Huang, Rongbing, Jay R. Ritter, and Donghang Zhang. "IPOs and SPACs: recent developments." Annual Review of Financial Economics 15, no. 1 (2023): 595-615.

Lamont, Owen. "Evaluating value weighting: Corporate events and market timing." (2002).

Ritter, Jay R., and Ivo Welch. "A review of IPO activity, pricing, and allocations." The Journal of Finance 57, no. 4 (2002): 1795-1828.

Stigler, George J. "Public regulation of the securities markets." Bus. Law. 19 (1963): 721.