How do investment banks value Initial Public Offerings (IPOs)?
Deloof, Marc De Maeseneire, Wouter Inghelbrecht, Koen
Deloof, Marc
De Maeseneire, Wouter
Inghelbrecht, Koen
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Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2009
Journal
Journal of Business Finance and Accounting
Book
Publication Volume
36
Publication Issue
1-2
Publication Begin page
130
Publication End page
160
Publication NUmber of pages
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Abstract
We investigate the valuation and the pricing of initial public offerings (IPOs) by investment banks for a unique dataset of 49 IPOs on Euronext Brussels in the 1993–2001 period. We find that for each IPO several valuation methods are used, of which Discounted Free Cash Flow (DFCF) is the most popular. The offer price is mainly based on DFCF valuation, to which a discount is applied. Our results suggest that DDM tends to underestimate value, while DFCF produces unbiased value estimates. When using multiples, investment banks rely mostly on future earnings and cash flows. Multiples based on post-IPO forecasted earnings and cash flows result in more accurate valuations.
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Keywords
Valuation