(Bloomberg) -- Companies whose shares jump on the first day after their initial public offerings are more likely to underperform in the longer term, according to Morgan Stanley.

Companies with “bubble-level” first day returns tend to be unprofitable, and years with higher proportions of such firms are likely to see the best single-day returns, equity strategists Edward Stanley and Matias Ovrum said in a note to clients Tuesday. The study is based on IPO data going back to the 1990s. 

For first-time share sales from 2020 to 2021, those that returned between 30% and 60% in their debut sessions underperformed the S&P 500 by 74% since January 2021 levels, the strategists found. The decline was even sharper among unprofitable technology companies, where the S&P 500 delivered returns nearly twice as large.

“Not surprisingly, euphoric first day returns tend to come at significantly elevated multiples and should be a warning sign to investors looking to buy and hold,” Stanley and Ovrum wrote.

Many investors’ judgment of the success of a public float is heavily influenced by the so-called first day pop, and expectations of what constitutes a good showing have grown, according to the report. Where a percentage point increase in the mid teens would have been considered successful in the 1990s or mid-2000s, investors are now looking at over 30% returns as “the norm, rather than the exception,” the strategists wrote.

Timing Signal

Although Morgan Stanley cautioned investors against chasing after first day pops, they added that the data contained a useful timing signal for companies: the best funding environments coincide with the highest short-term returns, they said, saying such jumps are “the largest driver of an IPO snowball effect.”

First-day returns showed a positive relationship between the number of subsequent IPO listings, and the amount of proceeds raised, in both the six months and 12 months after such a listing, according to the strategists. 

The findings will encourage companies and investors eagerly watching each sizeable new listing for indications as to whether the US IPO window in 2024 is cracking open any wider. Last year’s expected return to health, encouraged by Arm Holdings Plc’s $4.87 billion share sale, was essentially shuttered when it and other recent debutants including Birkenstock Holding Plc fell below their IPO prices. 

Read More: Weak 2023 IPO Returns Still Beat Covid-Era Listings

Both companies have risen comfortably above their initial levels, and a clutch of debuts since the start of the year — led by Amer Sports Inc.’s $1.6 billion IPO and subsequent share price rise — suggest optimism is returning. 

“The frequency of floats and initial market reaction in the US are now beginning to better resemble a typical start to an IPO cycle,” Stanley and Ovrum said. 

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