Why More Unprofitable Firms are Going Public But Investors Are Not Bothered

Our study, based on an in-depth analysis of 200 U.S. IPOs from 1988 to 2022, provides essential insights into the valuation dynamics of low-performing firms compared to their profitable counterparts. Despite attracting significant capital and high valuation premiums, low-performing IPOs are evaluated differently from profitable issuers. This research extends the existing literature, which mainly focuses on IPOs with positive earnings, by including both profitable and unprofitable IPOs. Our findings consistently show that low-performing firms receive significantly lower IPO valuations compared to their high-performing peers. Interestingly, this seems inconsistent with the rising trend of unprofitable firms going public, reminiscent of the dot-com crash in the early 2000s. The study highlights that valuation factors such as insider ownership, which significantly impacts low-performing firms, vary notably between high and low performers. Moreover, during market crashes, high-performing firms attract higher valuations as investors seek stability. Our research underscores that industry-specific conditions, rather than broader market trends, more significantly affect the valuation of low-performing firms. These findings are crucial for investors, emphasizing the need to differentiate between unprofitable and profitable issuers when evaluating IPOs, thereby facilitating more informed portfolio allocation decisions.