The Trouble with Linkedin

The post-lockup schmeissing of the Linkedin IPO continues apace today, as the following figure shows:


While many stocks are weak once employees are free to sell shares after an IPO, this is much worse than usual. Why? Well, one good reason is that the stock was broken from the get-go — it had no institutional support, in large part because of the small float, but also, arguably, because of the pricing.

The institutional ownership of LNKD was 12% of the public float post IPO, which is basement stuff. Look at the following graph showing institutional ownership in U.S. IPOs over time:

Ipo owners

As the above figure shows, LNKD’s 12% post-IPO institutional ownership puts it in the outer regions of the distribution. And that matters, because institutional investors provide a more stable, non-trading base for offerings, as well as, generally, paying more attention to whether a company is solid.

Not surprisingly, you can see the upshot in the performance numbers. Companies with strong institutional support — greater than 25% — tend to dramatically outperform those with less support. (This table and the preceding graph are from Field & Lowry, Institutional versus Individual Investment in IPOs: The Importance of Firm Fundamentals, JFQA, 44/3. 2009).


The upshot of all of this is that we are in a large-scale transition in the ecosystem that is shareholders of Linkedin stock. Retail investors are selling en masse, and institutional investors are neither holders nor picking up all the pieces. As a result, the stock continues its slide, one that will be arrested, but not quickly. [-]


  1. Which makes Linked In a long term buy.

    • Paul Kedrosky says:

      Okay. Because it will eventually have institutional support, or is this some complex argument?

  2. As an early user of linked in I tought it was a great tool democratic and so on and then they decided to switch the business model around to charging fees here and there and oups I was gone.

  3. Institutional investors lend some support to a stock, but I don't think that is a major driver of stock performance. Rather, institutional investors are simply better informed and better investors than retail investors. Therefore stocks with "institutional support" actually outperform because they are better companies and institutional investors just happen to realize that more often than retail investors.