What a Difference a Month Makes: Stock Analyst Valuations Following Initial Public Offerings
39 Pages Posted: 14 Aug 2003
Date Written: February 26, 2004
We examine how analysts establish target prices for IPO firms and whether comparable firms used to support target prices are helpful in explaining IPO offer prices. From 1996 to 2000, the average target price is set at a level more than twice the offer price that was established less than a month earlier. During the bubble period of 1999 to 2000, the average offer price was set at a 21 percent discount relative to comparable firm valuations. In contrast, we find that the average offer price was set at a 5 percent premium relative to comparables in the pre-bubble period. This dramatic shift appears to hold even after controlling for the differences in the types of firms going public during the bubble period. While our results suggest that underwriters systematically discounted offer prices during the bubble period, an alternative explanation is that the shift arose because underwriters and analysts faced different incentives and legal exposures during the bubble period.
Keywords: IPO, analysts, recommendations, target prices
JEL Classification: G3, G2, G1
Suggested Citation: Suggested Citation