A Comparison of Residual Income and Comparable Firm Valuation of Initial Public Offerings

Abstract:     
This study contributes to the body of research that examines the valuation of initial public offers (IPOs). The aim of this study is to assess the relative predictive ability of residual income valuation against the popular alternative of comparable firm valuation for predicting the offer prices of IPO firms. The results show that the residual income model outperforms a number of comparable firm multiples in predicting the offer price. The results suggest that fundamental valuation is a valuable tool in the IPO context for investors even when there is limited data available for estimating these models.

Keywords: residual income, comparable firm valuation, initial public offerings

JEL Classification: G12, G24, M41

working papers series