Assets in Place, Growth Opportunities, and IPO Returns

40 Pages Posted: 4 Aug 2005

See all articles by Kee H. Chung

Kee H. Chung

State University of New York at Buffalo - School of Management

Mingsheng Li

Bowling Green State University - College of Business Administration

Linda Q. Yu

University of Wisconsin - Whitewater - Finance and Business Law

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Abstract

We consider a simple model positing that initial public offering price is equal to the present value of an entity's assets in place and growth opportunities. The model predicts that initial return is positively related to both the size and risk of growth opportunities. Consistent with this prediction, we find initial return to be positively related to both the fraction of the offer price that is accounted for by the present value of growth opportunities and various proxies of issue uncertainty. We also find that IPO investors equate one dollar of growth opportunities to approximately three quarters of tangible assets.

Keywords: IPO returns, growth opportunities, assets in place, risk, reservation price

JEL Classification: G24, G32

Suggested Citation

Chung, Kee H. and Li, Mingsheng and Yu, Linda Q., Assets in Place, Growth Opportunities, and IPO Returns. Available at SSRN: https://ssrn.com/abstract=765884 or http://dx.doi.org/10.2139/ssrn.765884

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

Mingsheng Li

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

Linda Q. Yu

University of Wisconsin - Whitewater - Finance and Business Law ( email )

Whitewater, WI 53190
United States

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