IPO Pricing: Growth Rates Implied in Offer Prices

33 Pages Posted: 6 Mar 2008 Last revised: 9 Apr 2010

Giordano Maria Cogliati

University of Bergamo - Department of Economics and Technology Management

Stefano Paleari

University of Bergamo - SIGE Sezione di Ingegneria Gestionale

Silvio Vismara

University of Bergamo

Date Written: February 1, 2008

Abstract

This paper studies the valuation of companies going public and defines a methodology to infer the growth expectations implicit in their IPO prices. The proposed reverse-engineered DCF model is operable by individual investors, as it does not require access to private information or sell-side analysts’ forecasts.

Applying the procedure to a sample of IPOs in three European countries (France, Italy, and Germany), we estimate the cash flow growth implied by offer prices and examine the bias of implied growth in comparison to the realized. We find that the estimated growth in cash flow is much higher than its actual realization, with the median IPO firm overvalued at the offering by 74%. Estimation errors increase with IPO firms’ leverage and underpricing, while decrease with age, size, and book-to-market ratios. Further tests find that post-IPO returns are lower for issues whose implied growth is more upward biased.

Keywords: Initial Public Offerings (IPOs), valuation, growth rates

JEL Classification: G30

Suggested Citation

Cogliati, Giordano Maria and Paleari, Stefano and Vismara, Silvio, IPO Pricing: Growth Rates Implied in Offer Prices (February 1, 2008). Available at SSRN: https://ssrn.com/abstract=965450 or http://dx.doi.org/10.2139/ssrn.965450

Giordano Maria Cogliati

University of Bergamo - Department of Economics and Technology Management ( email )

Via Marconi 5
24044 Dalmine, Bergamo
Italy
+39 035 2052022 (Phone)

HOME PAGE: http://www.unibg.it/struttura/en_struttura.asp?rubrica=1&persona=2421&nome=Giordano%20Maria&cognome=

Stefano Paleari

University of Bergamo - SIGE Sezione di Ingegneria Gestionale ( email )

Via Marconi 5
24044 Dalmine, Bergamo
Italy
+39 03 520 52340 (Phone)
+39 03 556 2779 (Fax)

Silvio Vismara (Contact Author)

University of Bergamo ( email )

Via Marconi 5
24044 Dalmine, Bergamo
Italy
00390352052352 (Phone)
0039035562779 (Fax)

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