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

Marc Deloof
University of Antwerp; Université catholique de Louvain

Wouter De Maeseneire
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Koen Inghelbrecht
University College of Ghent - Department of Finance

Journal of Business Finance and Accounting, Vol. 36, No. 1/2, pp. 130-160, 2009

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.

Keywords: company valuation, initial public offerings, investment banks

JEL Classifications: G10, G12, G 24

Accepted Paper Series

Date posted: March 23, 2009 ; Last revised: March 30, 2009

Suggested Citation

Deloof, Marc, De Maeseneire, Wouter and Inghelbrecht, Koen, How Do Investment Banks Value Initial Public Offerings (IPOs)? (March, 21 2009). Journal of Business Finance and Accounting, Vol. 36, No. 1/2, pp. 130-160, 2009. Available at SSRN: http://ssrn.com/abstract=1366282

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Contact Information

Marc Deloof (Contact Author) University of Antwerp ( email ) Prinsstraat 13 Faculteit TEW B-2000 Antwerpen Belgium +32 3 220 41 69 (Phone) +32 3 220 47 99 (Fax) HOME PAGE: http://www.ua.ac.be/marc.deloof
Université catholique de Louvain ( email ) Louvain School of Management Place des Doyens, 1 Louvain-la-Neuve 1348 Belgium
Wouter De Maeseneire Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email ) P.O. Box 1738 3000 DR Rotterdam NL 3062 PA Netherlands
Koen Inghelbrecht University College of Ghent - Department of Finance ( email ) Voskenslaan 270 W. Wilsonplein 5D B-9000 Ghent 9000 Belgium +32 9 2422650 (Phone) +32 9 2424209 (Fax) HOME PAGE: http://users.ugent.be/~kjinghel/

Abstract

Citations (1)

Date posted: March 23, 2009 ; Last revised: March 30, 2009

Suggested Citation

Contact Information

Marc Deloof (Contact Author)

Wouter De Maeseneire

Koen Inghelbrecht