Prof. Jay Ritter: IPOs, SPACs, and the Hot Issue Market of 2020 (EP.139)

We’ve previously compared IPOs to lotteries that are prone to inflated valuations and low returns. Today we welcome “Mr. IPO,” Professor Jay Ritter onto the show for a deeper dive into IPO performance, for his insights into SPACs, and to hear his research into why economic growth doesn’t correlate with stock returns. Early in the episode, Jay unpacks how long-term IPO returns perform against first-day trading. While exploring the role that venture capital plays in tech IPOs, Jay talks about why negative earnings don’t affect tech IPOs in the short-term before sharing how skewness factors tend to impact young companies. Reflecting on how IPOs are usually underpriced, Jay discusses how the interests of companies are not aligned with the interests of IPO underwriters. After looking into IPO allocation, Jay compares the 2020 ‘hot IPO market’ with the internet bubble of the late 90s. Later, we ask Jay about what special-purpose acquisition companies (SPACs) are and why they’ve exploded in recent years. His answers highlight their investing benefits, risks, and why SPACs might be a better option for companies than IPOs. We examine how SPACs have historically performed and then jump into our next topic; why economic growth isn’t a good indicator that a country is worth investing in. He touches on why returns don’t correlate with economic growth, the place of capital gains and dividend yields when investing abroad, and how innovations in an industry can lead to higher stock returns. We wrap up our conversation by asking Jay for his take on whether the stock market is efficient before hearing how he defines success in his life. Tune in to hear our incredible and informative talk with Jay Ritter.

Key Points From This Episode:

• Introducing today’s guest, finance professor Jay Ritter. [0:00:03]
• How long-run returns of IPOs perform against the first trading day. [0:03:06]
• Industry differences in IPO returns and how venture capital affects tech IPOs. [0:03:33]
• Why it’s not always a bad idea to invest in IPOs. [0:05:22]
• Whether negative earnings for tech companies affect IPO performance. [0:07:32]
• Exploring the idea of skewness in IPO valuations and returns. [0:08:56]
• Jay shares advice on investing in IPOs. [0:11:07]
• Why IPOs tend to be underpriced. [0:12:44]
• Whether individuals get IPO allocations compared with hedge funds and brokerages. [0:18:00]
• The factors that lead to ‘hot IPO markets.’ [0:20:53]
• How technical innovation is linked to an increase in IPOs. [0:23:32]
• Whether hot IPO markets tell us anything about future expected returns. [0:26:33]
• Why 2020 was a hot IPO market and how it compares with the late 90s. [0:28:19]
• The dubious value of individual investors getting exposure in the private market. [0:30:50]
• Jay unpacks what special purpose acquisition companies (SPACs) are. [0:33:51]
• How new SPAC prices are rising despite not having acquired an operating company. [0:37:11]
• Ways that promoters benefit from launching SPACs. [0:38:34]
• Whether SPACs are a better route for going public than traditional IPOs. [0:42:44]
• We talk about the risks and historical performance of SPAC investing. [0:44:06]
• Jay details the upsides and downsides of investing in SPACs. [0:48:02]
• Insights into which foreign countries have been the best to invest in. [0:50:11]
• How industry growth can lead to higher returns in that industry. [0:56:30]
• What Jay uses to work out expected stock returns. [0:59:58]
• We ask Jay the big question; “Is the stock market efficient?” [01:04:29]
• Hear how Jay defines success in his life. [01:05:57]