Valuation of Internet Stocks - an IPO Perspective

38 Pages Posted: 24 Apr 2001

See all articles by Eli Bartov

Eli Bartov

NYU Stern School of Business

Partha S. Mohanram

Rotman School of Management, University of Toronto

Chandra Seethamraju

Franklin Templeton Investments

Date Written: April 2001

Abstract

We empirically investigate valuations of Internet firms at various stages of the initial public offering (IPO) from two perspectives. First, we examine the association between the valuation of Internet IPOs and a set of financial and nonfinancial variables, which prior anecdotal or empirical evidence suggests may serve as value drivers. Second, we document differences in IPO valuations between Internet and non-Internet firms as well as across different stages in the IPO processi.e., initial prospectus price, final offer price, and first trading day pricewithin each set of firms. Our primary two conclusions are as follows. First, there are noticeable differences between valuations of Internet and non-Internet firms, especially at the prospectus and final IPO stage. Specifically, the valuation of non-Internet firms generally follows the conventional wisdom regarding valuation: positive earnings and cash flows are priced, while negative earnings and negative cash flows are not. The valuation of Internet firms, however, departs from conventional wisdom, with earnings not being priced, and negative cash flows being priced perhaps because they are viewed as investments. This difference between the two classes of firms may be expected, given the age and unique nature of the Internet industry. Second, there are significant differences between the initial valuation of firms at the prospectus and IPO stage and their valuation by the stock market at the end of the first trading day. For non-Internet firms, the difference is largely ascribed to the relative offering size. For Internet firms, however, the differences are with respect to positive cash flows, sales growth, R&D, and high-risk warnings, in addition to the relative offering size.

Keywords: Analyst forecasts, bias, optimism, pessimism, underreaction, reporting bias, selection bias

JEL Classification: M41, G12

Suggested Citation

Bartov, Eli and Mohanram, Partha S. and Seethamraju, Chandrakanth, Valuation of Internet Stocks - an IPO Perspective (April 2001). Available at SSRN: https://ssrn.com/abstract=267928 or http://dx.doi.org/10.2139/ssrn.267928

Eli Bartov (Contact Author)

NYU Stern School of Business ( email )

44 W. 4th Street, Suite 10-96
New York, NY 10012
United States
212.998.0016 (Phone)

Partha S. Mohanram

Rotman School of Management, University of Toronto ( email )

Canada

Chandrakanth Seethamraju

Franklin Templeton Investments ( email )

Multi Asset Strategies
P.O. Box 997152
San Mateo, CA 95899-7152
United States

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