Evidence on Anchoring to Industry Multiples in IPO Pricing

40 Pages Posted: 14 Nov 2015 Last revised: 22 Sep 2018

See all articles by Sean Hundtofte

Sean Hundtofte

Federal Reserve Bank of New York; Yale University, School of Management

Sami Torstila

Aalto University

Date Written: September 11, 2018


We develop a hypothesis where IPO offer prices are anchored to average valuation multiples of industry peers. The hypothesis predicts initial price compression: IPOs with multiples higher than peers should experience higher-than-average abnormal returns, and vice versa. Accordingly, IPOs with P/E multiples higher (lower) than peers exhibit 2.8 percentage points higher (5.5 percentage points lower) first-day returns than average. A one-standard-deviation increase in valuation difference is associated with a 5-10 percentage-point higher first-day return. We find no evidence of associated reversals in long-term risk-adjusted returns. This explanation of IPO pricing is orthogonal to partial adjustment, prospect theory, and sentiment.

Keywords: Anchoring, IPOs, Behavioral Finance, Comparables, Contrast Effects

JEL Classification: G24, G32

Suggested Citation

Hundtofte, C. Sean and Torstila, Sami, Evidence on Anchoring to Industry Multiples in IPO Pricing (September 11, 2018). Available at SSRN: https://ssrn.com/abstract=2690869 or http://dx.doi.org/10.2139/ssrn.2690869

C. Sean Hundtofte (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Yale University, School of Management ( email )

New Haven, CT
United States

HOME PAGE: http://www.seanhundtofte.com

Sami Torstila

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
+358 40 353 8069 (Phone)

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