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Valuing and pricing IPOs

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  • Roosenboom, Peter

Abstract

This paper investigates how underwriters set the IPO firm’s fair value, an ex-ante estimate of the market value, using a unique dataset of 228 reports from French underwriters. These reports are issued before the IPO shares start trading on the stock market and detail how underwriters determined fair value. We document that underwriters often employ multiples valuation, dividend discount models and discounted cash flow (DCF) analysis to determine fair value but that all of these valuation methods suffer from a positive bias with respect to equilibrium market value. We also analyze how this fair value estimate is subsequently used as a basis for IPO pricing. We report that underwriters deliberately discount the fair value estimate when setting the preliminary offer price. Part of the intentional price discount can be recovered by higher price updates. We find that, controlling for other factors such as investor demand, part of underpricing stems from this intentional price discount.

Suggested Citation

  • Roosenboom, Peter, 2012. "Valuing and pricing IPOs," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1653-1664.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:6:p:1653-1664
    DOI: 10.1016/j.jbankfin.2012.01.009
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    References listed on IDEAS

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    1. Carter, Richard B & Manaster, Steven, 1990. " Initial Public Offerings and Underwriter Reputation," Journal of Finance, American Finance Association, vol. 45(4), pages 1045-1067, September.
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    Cited by:

    1. Abrahamson, Martin & De Ridder, Adri, 2015. "Allocation of shares to foreign and domestic investors: Firm and ownership characteristics in Swedish IPOs," Research in International Business and Finance, Elsevier, vol. 34(C), pages 52-65.
    2. repec:eee:intfin:v:49:y:2017:i:c:p:184-199 is not listed on IDEAS
    3. repec:spr:eurasi:v:7:y:2017:i:2:d:10.1007_s40821-016-0049-1 is not listed on IDEAS
    4. Stefano Paleari & Andrea Signori & Silvio Vismara, 2014. "How Do Underwriters Select Peers When Valuing IPOs?," Financial Management, Financial Management Association International, vol. 43(4), pages 731-755, December.
    5. Chuluun, Tuugi, 2015. "The role of underwriter peer networks in IPOs," Journal of Banking & Finance, Elsevier, vol. 51(C), pages 62-78.
    6. repec:eee:finana:v:57:y:2018:i:c:p:106-121 is not listed on IDEAS

    More about this item

    Keywords

    Initial public offerings; Valuation; Going public;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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