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The Valuation of Ipos by Investment Banks and the Stock Market: Empirical Evidence

29 Pages Posted: 28 Jan 2002  

Wouter De Maeseneire

Vlerick Business School; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Marc Deloof

University of Antwerp; Antwerp Management School

Koen Inghelbrecht

Ghent University - Department of Financial Economics

Date Written: January 11, 2002

Abstract

In this paper, pre-IPO value estimations by the lead underwriting investment bank of Belgian IPO stocks are compared to the offer price and the stock price in the first month of listing. The valuation methods used by the lead underwriter and the estimated values are often discussed in Belgian IPO-prospectuses. For 33 IPOs in the 1993-2000 period, we find that in all cases the lead underwriter uses several methods to estimate stock value. Discounted free cash flow, which is used to price all IPOs in the sample, is the most popular valuation method. The IPO offer price is mainly driven by the dividend discount model if applied. However, we find that the dividend discount model is not better in predicting the stock price than other valuation models. Moreover, our results suggest that the dividend discount model tends to underestimate value, while discounted free cash flow produces unbiased results. This indicates that underwriters consciously underprice the IPO by relying on a valuation method that tends to underestimate value. We also find that price/earnings and price/cash flow multiples using forecasted earnings and cash flows for the year after the IPO lead to more accurate valuations than multiples using forecasted earnings and cash flows for the IPO-year. Finally, our results indicate that the offer price is closer to the stock price after listing than individual valuation estimates, although the differences are not statistically significant.

Keywords: Company Valuation, Investment Banks, Initial Public Offering

JEL Classification: G30, G31

Suggested Citation

De Maeseneire, Wouter and Deloof, Marc and Inghelbrecht, Koen, The Valuation of Ipos by Investment Banks and the Stock Market: Empirical Evidence (January 11, 2002). EFMA 2002 London Meetings; EFA 2002 Berlin Meetings Discussion Paper. Available at SSRN: https://ssrn.com/abstract=298602 or http://dx.doi.org/10.2139/ssrn.298602

Wouter De Maeseneire

Vlerick Business School ( email )

Reep 1
Ghent
BE-9000 Ghent
Belgium

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Marc Deloof (Contact Author)

University of Antwerp ( email )

Prinsstraat 13
Faculteit TEW
Antwerpen, 2000
Belgium
+32 3 265 41 69 (Phone)
+32 3 265 47 99 (Fax)

HOME PAGE: http://https://www.uantwerpen.be/en/staff/marc-deloof/

Antwerp Management School ( email )

Het Brantijser
Sint-Jacobsmarkt 9-13
Antwerp, 2000
Belgium

Koen Inghelbrecht

Ghent University - Department of Financial Economics ( email )

Henleykaai 84
Ghent, B-9000
Belgium
+32 9 243 29 93 (Phone)

HOME PAGE: http://users.ugent.be/~kjinghel/

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