Well, that was anticlimactic.
After all the hullabaloo about Facebook’s IPO, this is how it ends, with a mere $0.23 jump in share price? That kind of movement is what happens after Procter & Gamble announces a more absorbent type of Pampers.
Yet it shouldn’t be all that surprising that Facebook’s opening day on the NASDAQ had all the excitement of a Matlockrerun. While no one knows exactly why Facebook landed with such a thud, there are a handful of good reasons that the company got poked by Wall Street. Among them:
1. It Was Priced Just Right
Call it the Goldilocks theory. This assumes that a lot of thought went into that $38 price, and the reason that the stock didn’t double is that the esteemed underwriters at Morgan Stanley, J.P. Morgan Chase and Goldman Sachs did their job right and accurately priced the stock.
That, however, depends on what your definition of “accurately” is. James Brau, professor of finance at Brigham Young University, says that over the past 40 years of IPOs, the average first-day pop is 18%.
So, if Facebook was looking to perform along those lines, it should have priced its shares in the low 30s.
In addition, underwriters don’t aim for a flat performance on the first day because of a practice called “leaving money on the table,” which rewards institutional investors for getting on board. Though that looks like a kickback of sorts, Brau says there’s no clear-cut reason why IPOs always factor leaving money on the table in.
“There are at least 50 different academic studies I know of that that have 35 different theories,” Brau says.
One popular theory is that it’s a way of rewarding such investors for honesty. The argument goes like this: During an IPO road show, the company and bankers are looking for an accurate read on what investors plan to spend.
If such investors didn’t know that they would be rewarded for telling the truth, then they would intentionally low-ball the amount they intend to buy at. If an institutional investor thought that the stock should be worth $10, say, then they might say they’ll spend $8 to enjoy the ride on the opening day. (cont … Mashable)