What a Difference a Month Makes: Stock Analyst Valuations Following Initial Public Offerings

39 Pages Posted: 14 Aug 2003

See all articles by Joel F. Houston

Joel F. Houston

University of Florida - Department of Finance, Insurance and Real Estate

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate

Jason J. Karceski

LSV Asset Management

Date Written: February 26, 2004

Abstract

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

Houston, Joel F. and James, Christopher M. and Karceski, Jason J., What a Difference a Month Makes: Stock Analyst Valuations Following Initial Public Offerings (February 26, 2004). EFA 2004 Maastricht Meetings Paper No. 2495; University of Florida Working Paper. Available at SSRN: https://ssrn.com/abstract=560502 or http://dx.doi.org/10.2139/ssrn.560502

Joel F. Houston

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3486 (Phone)
352-392-0301 (Fax)

Jason J. Karceski (Contact Author)

LSV Asset Management ( email )

155 N Wacker Dr.
Chicago, IL 60654
United States
352-246-7674 (Phone)

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