IPO valuation in an emerging market – a study in Iran

Abstract

Purpose

This study aims to highlight the accuracy, performance and selection of the IPO valuation methods in the Islamic Republic of Iran’s emerging market.

Design/methodology/approach

The authors performed accurate ex ante evaluations based on a pre-IPO data set obtained from valuation institutions. This study considered valuation methods through correlations, Mann–Whitney U tests and regression analysis, using a sample of 83 IPOs from January 2017 to March 2021.

Findings

The authors found that the dividend discount model (DDM) was the most popular in Iran. Even after controlling firm characteristics and market circumstances, the IPO price was highly correlated to pre-IPO reports’ estimates. The results showed that firms’ age, size and profitability affected the selection of valuation methods. The valuers did not apply forward P/E in a volatile market. Firm size affected the weights assigned to free cash flow to the firm, and the valuers considered the asset-in-place intensity to determine the weights of DDM, P/E and net asset value, and they mainly used the P/E to value old firms. Finally, this study estimated the accuracy of the pre-IPO report at 61% and found the highest accuracy to be associated with DDM.

Originality/value

IPO pricing in emerging markets constitutes a more significant dilemma than in developed markets. This paper provides empirical evidence of IPO pricing focusing on valuation methods used in the context of an emerging market – the Islamic Republic of Iran.

Citation

Hekmat, H., Rahmani, A. and Yazdifar, H. (2023), "IPO valuation in an emerging market – a study in Iran", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 16 No. 2, pp. 405-425. https://doi.org/10.1108/IMEFM-02-2022-0052