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How Do Investment Banks Value Initial Public Offerings (IPOs)?

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  • Marc Deloof
  • Wouter De Maeseneire
  • Koen Inghelbrecht

Abstract

We investigate the valuation and the pricing of initial public offerings (IPOs) by investment banks for a unique dataset of 49 IPOs on Euronext Brussels in the 1993–2001 period. We find that for each IPO several valuation methods are used, of which Discounted Free Cash Flow (DFCF) is the most popular. The offer price is mainly based on DFCF valuation, to which a discount is applied. Our results suggest that DDM tends to underestimate value, while DFCF produces unbiased value estimates. When using multiples, investment banks rely mostly on future earnings and cash flows. Multiples based on post‐IPO forecasted earnings and cash flows result in more accurate valuations.

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  • Marc Deloof & Wouter De Maeseneire & Koen Inghelbrecht, 2009. "How Do Investment Banks Value Initial Public Offerings (IPOs)?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1‐2), pages 130-160, January.
    • Handle: RePEc:bla:jbfnac:v:36:y:2009:i:1-2:p:130-160
    DOI: 10.1111/j.1468-5957.2008.02117.x
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    1. Olga Ferraro, 2021. "A Brief Overview of the IPO Valuation Methods," International Journal of Business and Management, Canadian Center of Science and Education, vol. 15(12), pages 1-41, July.
    2. Sommer Friedrich & Rose Christian & Wöhrmann Arnt, 2014. "Negative Value Indicators in Relative Valuation – An Empirical Perspective," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 9(1), pages 1-32, January.
    3. Abdul Rasheed & Muhammad Khalid Sohail & Shahab-Ud Din & Muhammad Ijaz, 2018. "How Do Investment Banks Price Initial Public Offerings? An Empirical Analysis of Emerging Market," IJFS, MDPI, vol. 6(3), pages 1-19, September.
    4. Matteo Bonaventura & Giancarlo Giudici, 2017. "IPO valuation and profitability expectations: evidence from the Italian exchange," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 7(2), pages 247-266, August.

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