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Does High IPO Valuation Benefit Investors?

In: Efficiency in Business and Economics

Author

Listed:
  • Bogumiła Brycz

    (Wroclaw University of Science and Technology)

  • Tadeusz Dudycz

    (Wroclaw University of Science and Technology)

  • Michał J. Kowalski

    (Wroclaw University of Science and Technology)

Abstract

This paper examines whether investors use information contained in the prospectus as indicators of firm quality and incorporate this information when pricing an IPO firm, and then it relates these IPO valuations to post-IPO returns. The study is based on a sample of IPO firms that went public on the Warsaw Stock Exchange during the period from 1998 to 2011. We find that a firm’s performance before going public is perceived by investors as an indicator of future performance and it affects IPO valuation. Specifically, our results indicate that high profitability achieved before IPO allows to obtain a high issue price to book value per share ratio. However, our results indicate that the relation between valuation during issuance and profitability gets weaker and ultimately completely disappears after IPO. As a result, 2 years after issuance there are no differences between firms’ performance no matter how high they were valued during IPO. Investors willing to pay a higher price for IPO shares do not achieve extra benefits both in terms of accounting and market rates of return.

Suggested Citation

  • Bogumiła Brycz & Tadeusz Dudycz & Michał J. Kowalski, 2018. "Does High IPO Valuation Benefit Investors?," Springer Proceedings in Business and Economics, in: Tadeusz Dudycz & Grażyna Osbert-Pociecha & Bogumiła Brycz (ed.), Efficiency in Business and Economics, pages 25-37, Springer.
    • Handle: RePEc:spr:prbchp:978-3-319-68285-3_3
    DOI: 10.1007/978-3-319-68285-3_3
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