Newly Listed Firms: Fundamentals, Survival Rates, and Returns

After 1979, the rate at which new firms are listed on the major U.S. stock exchanges increases sharply, asset growth rates of new lists are high, but their profitability declines and remains low for at least five years after listing. New lists also become less likely to survive, primarily because of delisting for poor performance. Overall, market prices reflect the volatile dynamics of new list fundamentals. Thus, for the full 1926 to 2000 period and the 1973 to 2000 Nasdaq period, value-weight and equalweight new list returns are close to benchmark returns. For the high action 1980 to 2000 period, equalweight new list returns are low, but value-weight returns are again close to benchmark returns. * Graduate School of Business, University of Chicago (Fama), and Tuck School of Business, Dartmouth College (French). We gratefully acknowledge the helpful comments of Frank Easterbrook, Kenneth Lehn, Jonathan Macey, Richard Roll, Hans Stoll, and seminar participants at UCLA. The market for publicly traded equity is the heart of a modern capitalist system, signaling the terms on which investors are willing to bear residual corporate risks. The market for newly listed firms is in turn a bellwether for the public equity market. It is the point of entry that gives firms expanded access to equity capital, allowing them to emerge and grow. Examining the characteristics of newly listed firms can provide interesting information about where in their life cycle firms become viable candidates for public equity financing. In Fama and French (2001), we document that the rate of new listings, largely on Nasdaq, explodes after 1979, from about 140 per year to more than 500 per year. The nature of new lists also changes. New lists always tend to be growth firms; they have high asset growth rates and low ratios of book value to the market value of equity. Before 1981, new lists tend to be more profitable than previously listed firms. The growth rates of new lists remain high after 1981, but their profitability slowly declines. (The low profitability of the internet-related new lists of the last few years, documented by Shultz and Zaman, (2001) is thus part of a longer-term phenomenon). Our earlier paper, Fama and French (2001), examines the characteristics of new lists only in the year of listing. The results raise three interesting questions about the life cycle of new lists, which we address here. (i) How do profitability and other fundamentals evolve in the years after listing? Do the fast-growing but less profitable new lists of the 1980s and 1990s move toward normal levels of profitability and growth as they age? (ii) Are the changes in the characteristics of new lists after 1981 accompanied by changes in survival rates? (iii) Do the stock prices of new lists accurately reflect the dynamics of their economic fundamentals; that is, do new lists generate normal risk-adjusted returns in the years after listing? We begin (section I) by examining the evolution of new list fundamentals. We confirm that new lists tend to be rapidly growing firms. Asset growth rates decay in the years after listing, but at least during the first five post-listing years, they remain well above those of all listed firms. Low ratios of the book value to the market value of equity, which persist long after listing, suggest that the market agrees