Eduardo Munoz/Reuters

Twitter is halfway through an eight-city road show, pitching its initial public stock offering to institutional investors and joining what is shaping up to be a resurgent market for I.P.O.s.

There’s a certain electricity in the air — and I’m reaching for a gas mask.

I don’t mean to denigrate Twitter or any particular company. Investors will make money on certain stocks and lose money on others. But the hype around I.P.O.s, especially now, is misplaced.

I.P.O.s should raise suspicion, not excitement. But don’t take my word for it. Here’s what my financial analysis textbook, circa 2001, had to say about them:



“Companies making extensive use of the new equity market tend to be what brokers call ‘story paper,’ potentially high-growth enterprises with a particular product or concept that brokers can hype to receptive investors (the words biotech and Internet come most readily to mind).” — Analysis for Financial Management, Sixth Edition, Robert C. Higgins, p. 127

I.P.O.s also should make investors ask why the company can’t grow some other way. In the years since the dot.com stock bubble burst in 2000, smaller private companies, in particular, have been less inclined to go public and instead have tended to merge with larger firms.

That’s not because the I.P.O. market was broken, as proponents of deregulation have argued ad nauseam. It’s because being big is key to being profitable, and getting big fast is key to getting profitable faster. So why not merge? Could it be that attracting the interest of a big established corporate buyer is more difficult than attracting the interest of what Mr. Higgins politely calls “receptive investors?”

And investors certainly are receptive these days, though not, as far as I can tell, for the right reasons. In general, the number of I.P.O.s and the amount of money raised track with the health of the economy. When the economy stalls, so do I.P.Os. When it recovers, so do I.P.O.s.

This time around, I.P.O.s are recovering even as the economy limps along. The stock market is rising, because of enormous support from the Federal Reserve, but the economy, on which corporate earnings ultimately depend, is stuck in low gear. Seen in that light, I.P.O.s look more like a way to cash in on a government-supported market than to invest in a functional capitalist economy.

There’s another cause for concern. A well-run I.P.O. market is premised on full and honest disclosure of company information made available to all public investors. But today’s I.P.O. market does not fit that description. As has been explained on this blog and elsewhere, the Jump-Start Our Business Start-Ups, or JOBS Act, passed in 2012, delayed and reduced federal disclosure and regulatory requirements during and after the I.P.O. of so-called “emerging growth companies” — a label that sounds narrow but actually includes all but the nation’s biggest new companies.

Where is that gas mask?