Gaming the IPO Window

New academic research reveals that private companies time their public listings to exploit temporary mispricings in comparable public stocks. The findings also help to explain the well-documented research findings of poor performance of IPOs, particularly the IPOs of smaller companies and those with negative earnings.

Every few years, a wave of companies floods the public markets. The timing rarely feels random to observers — IPO booms tend to cluster during bull markets, and busts leave the pipeline dry. But what exactly are company founders and their bankers responding to? Dora Horstman, Claire Li, and Wensong Zhong, authors of the April 2026 study “Anomalies and the Decision to Go Public,” found that private firms are strategically timing their IPOs to exploit moments when comparable public companies are temporarily overvalued.

The authors constructed a “Mispricing Score” (MSP) — aggregated from 177 documented return anomalies — and applied it to the public-market peers of private companies. They found that when those peers are overvalued, private companies:

· Are significantly more likely to file for an IPO

· Go public 23.4 months sooner

· Subsequently underperform in the long run—cumulative abnormal return of -20% over five years for high-MSP IPOs

What the researchers examined

The central challenge in studying IPO timing is separating two competing explanations.

· High valuations in a sector might reflect genuine growth opportunities — going public makes rational sense to fund expansion.

· High valuations might reflect investor biases and temporary mispricing — management is exploiting a fleeting window before reality corrects.

The authors argued that standard valuation proxies like price-to-book ratios cannot cleanly distinguish between these two forces. Thus, they used return anomalies as their measuring stick. Anomalies — patterns like momentum, accruals, and profitability measures — have been shown to predict stock returns not because of risk compensation, but because they capture mispricings that eventually correct. By aggregating 177 of them into a single composite score, the authors were able to measure how “temporarily overvalued” a stock appears.

They then matched each of 132,411 private firms in the PitchBook database to its five most similar public companies using text-based similarity analysis — comparing actual business descriptions from SEC filings rather than blunt industry codes. This allowed them to assign each private firm a peer-based mispricing score that reflects its specific competitive environment, not just broad sector trends.

“More than 80% of matched private firms were linked to peer networks spanning at least two distinct industry classification codes — highlighting how coarse traditional groupings can be.”

Key Findings

1. Mispricing predicts IPO entry

A one-standard-deviation increase in the peer mispricing score raises the probability of going public by 9% relative to the sample average. Firms whose peers fall in the most overvalued third of the distribution are 0.14 percentage points more likely to complete an IPO — a large effect given the unconditional probability is only 0.76%.

The authors controlled for industry and year effects throughout, meaning the results are not simply picking up aggregate bull markets. They found that within the same industry, in the same year, the firms whose specific public peers are more overvalued are the ones choosing to list.

2. Weaker firms respond more

The mispricing effect is most pronounced among lower-revenue private firms. For high-revenue companies with stronger fundamentals, the peer mispricing score has little predictive power. This is the opposite of what you would expect if the signal were picking up genuine growth opportunities — stronger firms would be best positioned to deploy external capital productively. Instead, it is precisely the weaker issuers who are most sensitive to favorable investor sentiment.

The authors interpret this as evidence that overvaluation in public peers relaxes financing constraints.

3. Academic publication weakens the effect

Because prior research has shown that once an anomaly is published, arbitrageurs trade against it and the mispricing erodes, the authors split the 177 anomalies into those that have been published in academic journals versus those that remain unpublished. They found that the IPO predictability of the mispricing score is almost entirely driven by the unpublished component. The published signal — the part of overvaluation that sophisticated investors are already aware of and trading against — has no statistically significant effect on IPO timing. This makes sense if the mechanism is mispricing.

4. Poor long-run post-IPO returns

IPOs conducted when public peers were overvalued earned cumulative abnormal returns of approximately −20% over the five years following the offering, after adjusting for industry, size, and book-to-market. Firms that went public when peers were undervalued earned roughly +10%. The divergence was near zero at issuance and widened steadily, consistent with a slow correction of the initial overvaluation rather than an immediate repricing.

5. No evidence of real investment

A key alternative hypothesis is that the mispricing score simply proxies for growth opportunities — firms going public in hot markets to fund valuable investments. The authors asked: Does a high peer mispricing score predict higher post-IPO capital expenditure or R&D spending? The answer is no. Higher mispricing scores do not predict more investment, stronger revenue growth, or better operating profitability after listing. The money raised in overvalued environments does not appear to go into productive projects.

6. IPO timing accelerates

Using survival analysis, the authors show that peer overvaluation also shortens the time to IPO. A one-standard-deviation increase in the mispricing score was associated with firms going public roughly 23 months sooner than they otherwise would. The window-of-opportunity logic is clear: when comparable public companies look expensive, waiting risks losing favorable pricing conditions.

Why This Matters

The findings carry implications beyond academic debates about market efficiency. If secondary-market mispricings systematically distort which private companies access public capital markets — and when — then stock market inefficiencies are not merely redistributing wealth among traders. They are shaping the real economy by directing capital toward firms timing a window rather than firms with the best investment opportunities.

The paper also contributes a hopeful corollary: as anomalies are published and arbitraged away, their ability to induce mispricing-driven IPOs diminishes. Academic research, by improving price efficiency, may modestly reduce the extent to which weak companies exploit overvalued windows to go public.

Key Investor Takeaways