Assets in Place, Growth Opportunities, and IPO Returns
40 Pages Posted: 4 Aug 2005
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: Suggested Citation