Money 2.0 Stuff: Can't stop the pop

The fundamental tension at play in IPO land is between rewarding early buyers and maximizing issuer proceeds. Resolving this tension has historically proven rather difficult. Matt Levine has a good theory on why “pops” might be an acceptable bi-product of IPOs. Some market participants are willing to provide large volumes of liquidity for an asset that has never traded in public markets: the IPO “pop” is simply an implicit bid-ask spread, albeit an atypically wide one, that compensates for this risk. 

I like this theory, it makes sense, and I think even ardent critics of IPOs would agree that early buyers deserve some discount in return for their purchase guarantees. Where the disagreement continues, however, is regarding the extent of the discount. In a market where equities are hot and risk is on and IPOs pop 100%+ on their first day of trading the purpose of a deep discount may not be as clear: firms are sacrificing marginal revenue to compensate for very unapparent risk.