Evidence on Anchoring to Industry Multiples in IPO Pricing
40 Pages Posted: 14 Nov 2015 Last revised: 22 Sep 2018
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: Suggested Citation