The Valuation of Ipos by Investment Banks and the Stock Market: Empirical Evidence

In this paper, pre-IPO value estimations by the lead underwriting investment bank of Belgian IPO stocks are compared to the offer price and the stock price in the first month of listing. The valuation methods used by the lead underwriter and the estimated values are often discussed in Belgian IPO-prospectuses. For 33 IPOs in the 1993-2000 period, we find that in all cases the lead underwriter uses several methods to estimate stock value. Discounted free cash flow, which is used to price all IPOs in the sample, is the most popular valuation method. The IPO offer price is mainly driven by the dividend discount model if applied. However, we find that the dividend discount model is not better in predicting the stock price than other valuation models. Moreover, our results suggest that the dividend discount model tends to underestimate value, while discounted free cash flow produces unbiased results. This indicates that underwriters consciously underprice the IPO by relying on a valuation method that tends to underestimate value. We also find that price/earnings and price/cash flow multiples using forecasted earnings and cash flows for the year after the IPO lead to more accurate valuations than multiples using forecasted earnings and cash flows for the IPO-year. Finally, our results indicate that the offer price is closer to the stock price after listing than individual valuation estimates, although the differences are not statistically significant.

[1]  Richard S. Ruback,et al.  The Valuation of Cash Flow Forecasts: An Empirical Analysis , 1994 .

[2]  Kristof De Wulf,et al.  Why it takes two to build succesful buyer-seller relationships , 2000 .

[3]  Ann Vereecke,et al.  Faculteit Economie En Bedrijfskunde Hoveniersberg 24 B-9000 Gent the Strategic Role of the Plant: Testing Ferdows' Model the Strategic Role of the Plant: Testing Ferdows' Model , 2022 .

[4]  Andrew W. Alford.  THE EFFECT OF THE SET OF COMPARABLE FIRMS ON THE ACCURACY OF THE PRICE EARNINGS VALUATION METHOD , 1992 .

[5]  Rudi Vander Vennet,et al.  Cost and Profit Efficiency of Financial Conglomerates and Universal Banks in Europe , 2002 .

[6]  Aimé Heene,et al.  A SYSTEMS VIEW ON WHAT MATTERS TO EXCEL , 2005 .

[7]  Rudi Vander Vennet,et al.  Determinants of Mutual Fund Performance : A Bayesian Stochastic Frontier Approach 1 , 2001 .

[8]  B. Clarysse,et al.  A process study of entrepreneurial team formation: the case of a research-based spin-off , 2004 .

[9]  Faculteit Economie,et al.  Supply of Venture Capital by European Governments , 2001 .

[10]  R. Vander Vennet,et al.  D/2001/7012/07 Efficiency Effects of Bank Mergers and Acquisitions in Europe , 2001 .

[11]  Jan Bouckaert,et al.  Bargaining in markets with simultaneous and sequential suppliers , 2002 .

[12]  H. Ooghe,et al.  Board composition , corporate performance and dividend policy , 1998 .

[13]  Freddy Heylen,et al.  Faculteit Economie En Bedrijfskunde Hoveniersberg 24 B-9000 Gent Inflation, Human Capital and Long-run Growth -an Empirical Analysis -* , 2001 .

[14]  K. Schoors,et al.  A Payment System Failure and its Consequences for Interrepublican Trade in the Former Soviet Union , 1998 .

[15]  S. Hart,et al.  The impact of new product launch strategies on competitive reaction in industrial markets , 2002 .

[16]  Tom Verbeke,et al.  Faculteit Economie En Bedrijfskunde Hoveniersberg 24 B-9000 Gent Environmental Quality and Economic Growth Chairman of the Centre for Environmental Economics and Management , 2002 .

[17]  Bart Baesens,et al.  Wrapped input selection using multilayer perceptrons for repeat-purchase modeling in direct marketing , 2001, Intell. Syst. Account. Finance Manag..

[18]  Stuart C. Gilson,et al.  Valuation of Bankrupt Firms , 1998 .

[19]  L. Pozzi,et al.  Government debt, imperfect information and fiscal policy effects on private consumption: evidence for two high debt countries , 2001 .

[20]  Freddy Heylen,et al.  A contribution to the empirical analysis of the effects of fiscal consolidation: explanation of failure in Europe in the 1990s , 1997 .

[21]  Bart Baesens,et al.  Bayesian neural network learning for repeat purchase modelling in direct marketing , 2002, Eur. J. Oper. Res..

[22]  Maggie Geuens,et al.  Validity and Reliability of Scores on the Reduced Emotional Intensity Scale , 2002 .

[23]  Patricia Everaert,et al.  The Impact of Target Costing on Cost , Quality and Development Time of New Products : Conflicting Evidence from Lab Experiments , 2001 .

[24]  L. Pozzi,et al.  Tax discounting and direct crowding-out in Belgium: implications for fiscal policy , 1999 .

[25]  Mike Wright,et al.  Determinants of required return in venture capital investments: a five-country study , 2002 .

[26]  Freddy Heylen,et al.  Monetaire unie en arbeidsmarkt: reflecties over loonvorming en macro-economisch beleid , 1998 .

[27]  Erik Demeulemeester,et al.  Discrete time/cost trade-offs in project scheduling with time-switch constraints , 2002, J. Oper. Res. Soc..

[28]  Katia Campo,et al.  The impact of stock-outs on whether, how much and what to buy , 2000 .

[29]  N. Gobbin,et al.  Fiscal Adjustments and Their Effects During the Transition to the EMU , 2001 .

[30]  Ignace De Beelde,et al.  EXPECTATIONS OF USERS OF FINANCIAL INFORMATION WITH REGARD TO THE TASKS CARRIED OUT BY AUDITORS , 1999 .

[31]  Sabien Dobbelaere,et al.  Insider power and wage determination in Bulgaria , 2002 .

[32]  Gerdie Everaert,et al.  Public capital and labour market performance in Belgium , 2000 .

[33]  Katleen Baeyens,et al.  The survival of venture capital backed companies , 2002 .

[34]  Paul Gemmel,et al.  The design of a MRP-based hospital service requirements planning system: the impact of different sources of uncertainty , 1995 .

[35]  M Verhue,et al.  Demand for unemployment insurance - a survey based analysis , 1997 .

[36]  Rudi Vander Vennet,et al.  Causes and consequences of EU bank takeovers , 1999 .

[37]  Jan Camerlynck,et al.  Are Acquisitions Worthwhile? An Empirical Study of the Post Acquisition Performance of Privately Held Belgian Companies Involved in Take-Overs , 2001 .

[38]  E. J. Nijssen,et al.  Industrial Pricing Practices and Determinants , 1997 .

[39]  Gerdie Everaert,et al.  Infrequent Large Shocks to Unemployment: New Evidence on Alternative Persistence Perspectives , 2001 .

[40]  P. De Pelsmacker,et al.  Advertising Content and Irritation: A Study of 226 TV Commercials , 1999 .

[41]  Ans De Vos,et al.  Perceptions of the value of the HR function , 2001 .

[42]  Wim Meeusen,et al.  Social protection competition in the EMU , 2000 .

[43]  Koen Dewettinck,et al.  EMPLOYMENT IMPLICATIONS OF DOWNSIZING STRATEGIES AND REORIENTATION PRACTICES: AN EMPIRICAL EXPLORATION. , 2002 .

[44]  N. Sierens,et al.  International Comparison of Failure Prediction Models From Different Countries: An Empirical Analysis , 1999 .

[45]  Tél,et al.  Faculteit Economie En Bedrijfskunde Hoveniersberg 24 B-9000 Gent Sovereign Credit Spreads and the Composition of the Government Budget , 2001 .

[46]  Eddy Omey,et al.  De kloof tussen laag- en hooggeschoolden en de politieke houdbaarheid van de Belgische werkloosheidsverzekering: een empirische analyse , 1999 .

[47]  Johan Christiaens,et al.  Converging New Public Management Reforms and Diverging Accounting Practices in Flemish Local Governments , 2001 .

[48]  Rudi Vander Vennet,et al.  The effect of mergers and acquisitions on the efficiency and profitability of EC credit institutions , 1996 .

[49]  Johan A. K. Suykens,et al.  Knowledge discovery in a direct marketing case using least squares support vector machines , 2001, Int. J. Intell. Syst..

[50]  Stefaan Vandorpe,et al.  De arbeidsmarktintegratie van afgestudeerden uit TSO en BSO. , 1997 .

[51]  H. Ooghe,et al.  Corporate Performance and Board Structure in Belgian Companies , 2001 .

[52]  Kristian Rydqvist,et al.  Going public in the 1980s: Evidence from Sweden , 1995 .

[53]  M. Pagano,et al.  Why Do Companies Go Public? An Empirical Analysis , 1995 .

[54]  Patrick Van Kenhove,et al.  The influence of topic involvement on mail survey response behavior , 2002 .

[55]  Erik Schokkaert,et al.  Individual preferences concerning unemployment compensation: Insurance and solidarity , 1997 .

[56]  Sabien Dobbelaere,et al.  Insider power and wage determination in Bulgaria: an econometric investigation , 2002 .

[57]  Inside the black box of innovation : Strategic differences between SMEs , 2000 .

[58]  Jan Camerlynck,et al.  Pre-Acquisition Profile of Privately Held Companies Involved in Takeovers: An Empirical Study , 2000 .

[59]  R. Vander Vennet,et al.  Exact Factor Pricing in a European Framework , 2000 .

[60]  Dirk Buyens,et al.  WORKING PAPER BUILDING A CONCEPTUAL FRAMEWORK ON THE EXPLORATORY JOB SEARCH , 2001 .

[61]  Marc Deloof,et al.  Are Leases and Debt Substitutes? Evidence from Belgian Firms , 1999 .

[62]  Marc Deloof,et al.  Intragroup Debt, Intragroup Guarantees, and the Capital Structure of Belgian Firms , 1999 .

[63]  Ignace De Beelde,et al.  An exploratory investigation of industry specialization of large audit firms , 1997 .

[64]  Peter Vlerick,et al.  Patients' and personnel's perceptions of service quality and patient satisfaction in nuclear medicine , 2002, European Journal of Nuclear Medicine and Molecular Imaging.

[65]  Marion Debruyne,et al.  Effective pricing of new industrial products , 1997 .

[66]  F. Langerak,et al.  Non-Probability Sampling for WWW Surveys: A Comparison of Methods , 1998 .

[67]  Sofie Balcaen,et al.  The Ooghe-Joos-De Vos failure prédiction models: a cross-industry validation , 2003 .

[68]  Véronique Weets,et al.  Who will be the new auditor ? , 1999 .

[69]  Gerdie Everaert,et al.  Balanced growth and public capital: an empirical analysis with I(2)-trends in capital stock data. , 2003 .

[70]  Koen Schoors,et al.  The credit squeeze during Russia's early transition: A bank‐based view , 2001 .

[71]  J. Albrecht,et al.  Environmental Consumer Subsidies and Potential Reductions of CO 2 Emissions , 1998 .

[72]  P. Kenhove,et al.  The Impact of Physical Attractiveness in Advertising on Consumer Attitude : The Role of Product Involvement , 1997 .

[73]  Regine Slagmulder,et al.  Using Management Control Systems to Achieve Alignment Between Strategic Investment Decisions and Strategy , 1997 .

[74]  M. Bradbury,et al.  The Accuracy of Price-Earnings and Discounted Cash Flow Methods of IPO Equity Valuation , 2000 .

[75]  Tél,et al.  Reversed Score and Likelihood Ratio Tests , 2022 .

[76]  Johan Christiaens,et al.  Financial Accounting Reform in Flemish Universities: An Empirical Study of the Implementation , 2003 .

[77]  Erik Schokkaert,et al.  Best affine unbiased response decomposition , 2003 .

[78]  Ignace De Beelde,et al.  Creating a profession 'out of nothing'? The case of the Belgian auditing profession , 2002 .

[79]  Gerdie Everaert,et al.  Public capital and productivity growth in Belgium , 1998 .

[80]  Johan Albrecht,et al.  Environmental Regulation, Comparative Advantage and the Porter Hypothesis , 1998 .

[81]  Johan Christiaens,et al.  Innovations in governmental accounting systems: the concept of a 'Mega General Ledger' in Belgian provinces , 2001 .

[82]  P. V. Kenhoveb,et al.  Automatic Activation of the Self in a Persuasion Context , 1999 .

[83]  Hans Degryse,et al.  Price competition between an expert and a non-expert , 1998 .

[84]  Ans De Vos,et al.  The added value of the HR-department: Empirical study and development of an integrated framework , 1999 .

[85]  Marc Deloof,et al.  Belgian Intragroup Relations and the Determinants of Corporate Liquid Reserves , 2001 .

[86]  J. Bouckaert,et al.  Recente inzichten in de industriële economie over de ontwikkelingen in de telecommunicatie , 2001 .

[87]  Peter Vlerick,et al.  The Effect of Mood on Self-Referencing in a Persuasion Context , 2001 .

[88]  Marc Jegers,et al.  Trade Credit, Corporate Groups, and the Financing of Belgian Firms , 1999 .

[89]  Gerdie Everaert,et al.  Shifts in balanced growth and public capital: an empirical analysis for Belgium , 1999 .

[90]  G. Odekerken-Schröder,et al.  Investments in Consumer Relationships: A Cross-Country and Cross-Industry Exploration , 2001 .

[91]  P.P.M. Joos,et al.  Semi-annual earnings announcements and market reaction: some recent findings for a small capital market , 1996 .

[92]  Pablo Fernández.  Internet Valuations: The Case of Terra-Lycos , 2012 .

[93]  H. Ooghe,et al.  ARE FAILURE PREDICTION MODELS TRANSFERABLE FROM ONE COUNTRY TO ANOTHER ? AN EMPIRICAL STUDY USING BELGIAN FINANCIAL STATEMENTS , 2003 .

[94]  L. Pozzi,et al.  The coefficient of relative risk aversion: a Monte Carlo study investigating small sample estimator problems , 2003 .

[95]  Harry J. Sapienza,et al.  A COMPARISON OF VENTURE CAPITALIST GOVERNANCE AND VALUE-ADDED IN THE U.S. AND WESTERN EUROPE. , 1995 .

[96]  Dirk Van den Poel,et al.  Faculteit Economie En Bedrijfskunde Hoveniersberg 24 B-9000 Gent Predicting Mail-order Repeat Buying: Which Variables Matter? Predicting Mail-order Repeat Buying: Which Variables Matter? , 2022 .

[97]  R. Cooper.  Factors Influencing the Target Costing Process : Lessons From Japanese Practice By , 1997 .

[98]  Katia Campo,et al.  Towards understanding consumer response to stock-outs , 2000 .

[99]  Kristof De Wulf,et al.  The influence of seller relationship orientation and buyer relationship proneness on trust, commitment, and behavioral loyalty in a consumer environment , 2000 .

[100]  Erik Schokkaert,et al.  Three Meanings of Intergenerational Mobility , 2001 .

[101]  Jozef Maton,et al.  The Cape of Good Hope. Employment and income distribution in South Africa , 1995 .

[102]  H. Ooghe,et al.  Financial Management Practices in China , 1998 .

[103]  Koen Schoors,et al.  The Fate of Russia's Former State Banks: Chronicle of a Restructuring Postponed and a Crisis Foretold , 2003 .

[104]  P.P.M. Joos,et al.  The Comparison between Market Dtermined and Accounting Determined Measures of Risk: An Empirical Assessment for the Non-Financial Firms Listed at the Brussels Stock Exchange , 1991 .

[105]  Jan Bouckaert,et al.  Monopolistic competition with a mail order business , 2000 .

[106]  Annouk Lievens,et al.  Communication flows in international product innovation teams , 2000 .

[107]  Tom Verbeke,et al.  Environmental Policy, Policy Uncertainty and Relocation Decisions , 2002 .

[108]  Koen Vanhoof,et al.  Credit classification: A comparison of logit models and decision trees , 1998 .