The Accuracy of Price-Earnings and Discounted Cash Flow Methods of IPO Equity Valuation

Posted: 16 Aug 2000

See all articles by Michael E. Bradbury

Michael E. Bradbury

Massey University

Jason Ferguson

University of Auckland - Business School

Henk Berkman

University of Auckland - Business School

Abstract

This paper compares estimates of value derived from conventional discounted cash flow and price earnings valuation methods to the market price. For a sample of 45 firms newly listed on the New Zealand Stock Exchange our results suggest that the best discounted cash flow method and the best price earnings comparable have similar accuracy. The median absolute pricing error is around 20 percent; and the models explain around 70 percent; of the cross-sectional variation in market price scaled by book value. The results serve to corroborate the findings of Kaplan and Ruback (1995).

JEL Classification: G12, G31, G32, M41

Suggested Citation

Bradbury, Michael E. and Ferguson, Jason and Berkman, Henk, The Accuracy of Price-Earnings and Discounted Cash Flow Methods of IPO Equity Valuation. Journal of International Financial Management & Accounting, Vol. 11, Issue 2, Summer 2000. Available at SSRN: https://ssrn.com/abstract=234328

Michael E. Bradbury (Contact Author)

Massey University ( email )

School of Accountancy
Private Bag 102 904
Auckland
New Zealand
64 9 414 0800 (Phone)
64 9 441 8133 (Fax)

Jason Ferguson

University of Auckland - Business School

Private Bag 92019
Room: OCH09
Auckland
New Zealand
(64 9) 3737599 Ext. 7563 (Phone)

Henk Berkman

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
Auckland
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

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