Monday, October 29, 2012

Weaknesses In The IPO Market Reflect Weakness In US Economic Growth

From The Federal Reserve Bank Of New York, "Weakness in the U.S. IPO Market" by Stavros Peristiani:
IPO activity in the United States has fluctuated over the past three decades, influenced by the strength of the economy, technological and financial innovations, and other company- and industry-specific factors. The number and nominal volume of IPO proceeds surged in the 1990s, especially during the Internet boom period between 1995 and 2000, but plummeted after the collapse of the high-tech bubble in 2000 (see chart below).
Source: Federal Reserve Bank Of New York
Another way to measure the drop-off in IPO activity is relative to the total stock market capitalization in the United States (see chart below). Historically, the IPO market has rebounded from adversity, recovering after recessions in the early 1980s and 1990s. However, the number of priced offerings and volume of proceeds have remained very low throughout the 2000s.
Source: Federal Reserve Bank Of New York
A Threatened Growth Outlook?
Although IPO flows represent a relatively small share of total stock market capitalization, they’re a vital source of organic growth for equity markets. As such, newly listed companies have to be financially strong and possess the capacity to develop and flourish. As this post suggests, the relatively few IPOs that occurred between 2001 and 2011, many of which had lackluster fundamentals, could be the harbinger of a more challenging growth outlook for U.S. equity markets.

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