An October 2012 study by Stanford Graduate School of Business professor Shai Bernstein shows that investing in companies’ initial public offerings (IPOs) isn’t a short-term endeavor.
Bernstein’s study looked at about 1,500 companies over a 5-year period. The study didn’t identify the performance of specific companies nor IPO results by industry. Overall, Bernstein found, companies that went public experienced a 40 percent decline in the importance or uniqueness of their innovations about 2 years after the IPO. He theorizes that meeting shareholder expectations diverts funding from innovation.
However, the study also found that, as a whole, companies added patents by buying private companies, perhaps to get their innovative momentum back. Those acquired patents were of higher quality than the companies’ original patents, Bernstein found.
Consequently, when it comes to investing in newly public companies, it makes sense to take the long view: You shouldn’t give up on a newly public company, but you should anticipate that any returns likely will come slowly.