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1 – 10 of over 2000Hanieh Hekmat, Ali Rahmani and Hassan Yazdifar
This study aims to highlight the accuracy, performance and selection of the IPO valuation methods in the Islamic Republic of Iran’s emerging market.
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.
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Ramzi Benkraiem, Duarte Gonçalves and Fatima Shuwaikh
Building on the venture capital (VC) literature, this paper aims to study the impact of the value added by corporate venture capitalists (CVCs) on their funded companies by…
Abstract
Purpose
Building on the venture capital (VC) literature, this paper aims to study the impact of the value added by corporate venture capitalists (CVCs) on their funded companies by comparing its IPO valuation with its independent venture capitalists (IVCs) peers.
Design/methodology/approach
This study uses a sample of 3,719 VC-backed ventures, between the years 1998 and 2020. The empirical analysis focuses on the propensity score matching approach, pairing ventures based on their probability of being funded by CVCs, and consequently, interpret the results derived from the valuation multiple ratios between the “nearest neighbors.”
Findings
This study finds that companies funded by CVCs can achieve higher valuations at their IPO compared to IVC-backed companies. Moreover, CVC-backed companies outperformance is mainly driven by startups which hold a technological fit with their CVC investor, with higher technological overlaps being translated into more significant valuations.
Research limitations/implications
This study presents systematic evidence to the subject concerning ventures’ type of investors and its effect on the startups’ IPO valuations.
Practical implications
This paper contributes to the enrichment of the industry’s literacy while also easing entrepreneurs’ decisions when choosing a funding partner. CVCs offer a variety of services and support that fits the specific needs of their funded companies.
Originality/value
To the best of the authors’ knowledge, this study is among the first to examine the role of CVCs as a tool to help venture growth.
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Chui Zi Ong, Rasidah Mohd-Rashid and Kamarun Nisham Taufil-Mohd
The purpose of this study is to examine the influence of underwriter reputation on the valuation of Malaysian initial public offerings (IPOs).
Abstract
Purpose
The purpose of this study is to examine the influence of underwriter reputation on the valuation of Malaysian initial public offerings (IPOs).
Design/methodology/approach
This study employed cross-sectional multiple regression models to analyse the relationship between underwriter reputation and IPO valuation that included 466 IPOs listed on Bursa Malaysia from 2000 to 2017.
Findings
The results revealed that underwriter reputation had a significant negative association with IPO valuation. Firms that engaged the services of reputable underwriters had their IPO offer prices set lower than the intrinsic values during the listing. After incorporating firms' size, this study found a positive relationship between underwriter reputation and IPO valuation. Big firms (high quality) hired reputable underwriters for certification purposes as issuers were aware that the cost of hiring a reputable underwriter would be justified by increased transparency after listing. Therefore, firms that engaged reputable underwriters had approximately fair values since issuers assumed that the price would be close to the intrinsic value following enhanced transparency post-listing.
Research limitations/implications
Future studies should focus on other non-financial factors, such as auditor reputation.
Originality/value
The present study provides new insights into the certification role of underwriters in valuing IPOs in the Malaysian market.
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Chui Zi Ong, Rasidah Mohd-Rashid, Waqas Mehmood and Ahmad Hakimi Tajuddin
This paper aimed to explore the effect of a regulatory change pertaining to earnings forecasts disclosure from a mandatory to a voluntary regime on the valuation of Malaysian…
Abstract
Purpose
This paper aimed to explore the effect of a regulatory change pertaining to earnings forecasts disclosure from a mandatory to a voluntary regime on the valuation of Malaysian initial public offerings (IPOs).
Design/methodology/approach
The study employed ordinary least square (OLS) regression and quantile regression to analyse the impact of disclosure of earnings forecasts regulation on the valuation of IPOs which comprised 458 IPOs reported for the period 2000–2017 on Bursa Malaysia.
Findings
This paper revealed that the regulatory change in forecasted earnings disclosure from a mandatory to a voluntary regime, effective from 1 February 2008, had a negative impact on the valuation of IPOs. The regime change did not improve the transparency of firms issuing IPOs. In fact, the absence of forecasted earnings information in most IPO prospectuses caused ex ante uncertainties to increase. Voluntary disclosure, however, had a significant positive relationship with the valuation of the IPOs issued during the global financial crisis period (2008–2010). Firms concealed their poor qualities by excluding forecasted earnings information from their prospectuses in order to have a fair valuation.
Practical implications
The findings may be used by policymakers as guidance in improving the existing regulation regarding the disclosure of forecasted earnings.
Originality/value
This paper provides new insight on the effect of a regulatory change pertaining to earnings forecasts disclosure from a mandatory to a voluntary regime on the valuation of Malaysian IPOs. It also provides evidence that the regulatory change of earnings forecast disclosure affects the IPOs' values listed during the global financial crisis period.
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Chui Zi Ong, Rasidah Mohd-Rashid and Kamarun Nisham Taufil-Mohd
This study aims to investigate the valuation accuracy of Malaysian initial public offerings (IPOs) by using price-multiple methods.
Abstract
Purpose
This study aims to investigate the valuation accuracy of Malaysian initial public offerings (IPOs) by using price-multiple methods.
Design/methodology/approach
Cross-sectional data including 467 IPOs listed on the Malaysian stock exchange were used for the period of 2000–2017. This study used univariate ordinary least square (OLS) regression to analyse the relationship between IPOs’ price-multiples and comparable firms’ price-multiples. The test of valuation accuracy was conducted via computing valuation errors by segregating the sample into two groups: fixed-price IPOs and book-built IPOs. Furthermore, multiple OLS regression was used to examine the influence of IPO valuation on underpricing.
Findings
The findings of the results suggested that IPOs price-to-earnings (P/E), price-to-book (P/B) and price-to-sales (P/S) multiples were positively related to the median P/E, P/B and P/S multiples of five comparable firms matched by industry and revenues. The P/S multiple was shown to be the most significant valuation method, specifically in book-built IPOs. The findings indicated that those firms that had a lower valuation in comparison to the comparable firms were inclined to underprice their IPOs to allure investors to subscribe IPOs. In addition, book-built IPOs that had fair valuations were inclined to generate higher initial returns for investors.
Practical implications
The findings of this study observed implications for underwriters in avoiding the mis-valuation issue by considering the book-building mechanism.
Originality/value
This study attempted to explore the suitability of the valuation method to value IPOs in Malaysia.
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Robert Hull, Rosemary Walker and Sungkyu Kwak
The purpose of this paper is to examine the effects of R&D manipulation on stock valuation for periods around IPOs. Insider manipulation is the difference in actual R&D change…
Abstract
Purpose
The purpose of this paper is to examine the effects of R&D manipulation on stock valuation for periods around IPOs. Insider manipulation is the difference in actual R&D change minus predicted R&D change where a negative difference indicates R&D underinvestment.
Design/methodology/approach
This study is designed to build on prior IPO research that has found reduced R&D expenditures when insiders lower their ownership. The paper derives an R&D manipulation variable that measures underinvestment in R&D. This variable is used in a regression methodology to test its influence on: IPO stock valuation at various points in time and post‐IPO price changes relative to the offer price.
Findings
The paper discovers that greater underinvestment in R&D is associated with greater values during the IPO stock valuation process. This association is reversed when the paper looks at short‐term valuation based on market prices. Only for bubble period IPOs do the paper finds poorer valuations for the long‐term. Larger insider ownership decreases lead to poorer valuations regardless of the period of occurrence. Greater R&D underinvestment and insider ownership decreases both lead to less underpricing.
Research limitations/implications
Like prior research, the paper assumes that knowledge about the change in R&D is known at the time of the offering. Interpretations for long‐run results can be tenuous due to unexpected changes that occur over time.
Practical implications
Investors should note that managers are able to set higher offer prices when they inflate earnings by underinvesting in R&D. Buying at an inflated offer price with R&D manipulation leads to losses in the aftermarket with these losses associated with IPOs that occur during a bubble period.
Social implications
Misrepresentation during the IPO valuation process affects those who buy shares at inflated prices. This raises ethical questions about the behavior of those involved in the issuance process.
Originality/value
This study is unique in testing how R&D manipulation and changes in insider ownership proportions impact the: IPO valuation process, post‐IPO valuation, and changes in the stock price over time relative to the offer price.
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Many foreign firms have made their initial public offering (IPO) debuts in the USA, without first being listed in their home market. The purpose of this paper is to investigate…
Abstract
Purpose
Many foreign firms have made their initial public offering (IPO) debuts in the USA, without first being listed in their home market. The purpose of this paper is to investigate the association of a wide range of country risk measures with the valuation of foreign IPOs.
Design/methodology/approach
Based on the law and finance literature, it is hypothesized that IPO firms domiciled in countries with higher country risk are worth less, other things equal. This hypothesis is tested with a sample of international companies making their IPO debuts in the USA between 1986 and 2002.
Findings
It is found that several commonly used country‐level variables explain the observed IPO valuation differences across countries. In particular, the index of economic freedom, developed by the Heritage Foundation, and the Transparency International's corruption index have a significant impact on post‐offer IPO valuations. Specifically, IPO firms hailing from countries with more economic freedom and less corruption are associated with higher valuation in the aftermarket.
Originality/value
The paper investigates whether some commonly‐used country risk measures affect the valuation of newly US‐listed foreign firms.
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Zhijian Xu and Libo Xu
The purpose of this paper is to study whether there is correlation between valuation in initial public offering (IPO) and board composition, the ownership dispersion of top…
Abstract
Purpose
The purpose of this paper is to study whether there is correlation between valuation in initial public offering (IPO) and board composition, the ownership dispersion of top management teams (TMTs) and their human capitals, in entrepreneurial firms of China's new growth enterprise market (GEM). Also, it aims to evaluate the relative importance of various factors in determining initial public issuing value.
Design/methodology/approach
The SPSS 16.0 statistical package was used to perform the analysis. The authors compute descriptive statistics, calculate correlation coefficients for all variables and use multiple regression analysis test the hypothesis.
Findings
The paper shows that IPO valuation has significant positive correlation with board composition, significant negative correlation with TMT ownership dispersion, but it does not show significant correlation with TMT human capital. The empirical results also show that: the influence of variable “CEO also Founder” on IPO valuation is significant, which indicates that investors are concerned with the leadership of firms in IPO. Also the influence of the variable “underwriter prestige” on IPO valuation is also significant, but weaker, which indicates that investors still keep confidence in the well‐known underwriters for their vision and ability of judging the firms.
Research limitations/implications
Based on the first batch of 28 entrepreneurial firms listed on Chinese GEM, the sample size is relative small. Also, the measure of TMT human capital, defined by the education degree level, is not an accurate rule in this paper.
Originality/value
Focusing on 28 new firms in China's new security market, this paper presents some interesting and new findings, by using data from the first batch of listed companies in China's GEM, which comprises many privately‐owned, high technology and entrepreneurial firms.
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The purpose of this paper is to examine how pre-IPO cash flow and earnings volatility influence both post-IPO pricing and valuation. This paper provides an empirical extension of…
Abstract
Purpose
The purpose of this paper is to examine how pre-IPO cash flow and earnings volatility influence both post-IPO pricing and valuation. This paper provides an empirical extension of Pástor and Veronesi’s (2003, 2005) argument that uncertainty surrounding a private firm’s expected profitability can impact how the firm is valued in the IPO aftermarket.
Design/methodology/approach
This paper includes a sample of 695 IPOs between 1996 and 2011. Pre-IPO financial statement data are hand collected from the EDGAR database. Pre-IPO cash flow and earnings volatility is computed using the standard deviation of the firm’s three years of cash flows and earnings prior to the IPO. Tobin’s Q serves as a measure of post-IPO firm valuation. This paper includes two subsamples to account for the “hot” IPO market of the late 1990s.
Findings
Firms with higher pre-IPO cash flow volatility are associated with higher post-IPO aftermarket valuations. This result holds for both the “hot” IPO and the later sub-sample. Pre-IPO earnings volatility does not influence aftermarket valuations, suggesting that only the uncertainty surrounding cash flows serves as a salient measure to IPO investors. Finally, IPO underpricing is associated with pre-IPO cash flow volatility, suggesting another channel in which IPO pricing is influenced.
Research limitations/implications
The hand collection for this paper is laborious and is limited to yearly cash flow and earnings numbers. The paper documents that quarterly and yearly cash flow and earnings volatility measures are highly correlated for the select stocks that allow for such testing. Further, a broader sample that accounts for more international IPO issues might corroborate the findings in this paper.
Practical implications
This study shows that investors both initially price and value IPO firms base on their pre-IPO cash flow volatility.
Originality/value
This is the first paper to examine the direct link between pre-IPO cash flow and earnings volatility on IPO aftermarket valuation and IPO pricing.
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Lucio Cassia, Stefano Paleari and Silvio Vismara
In this chapter we study the peer comparable approach used for the valuation of companies that went public on the Italian Nuovo Mercato. In Italy, IPO prospectuses often report…
Abstract
In this chapter we study the peer comparable approach used for the valuation of companies that went public on the Italian Nuovo Mercato. In Italy, IPO prospectuses often report the valuation methods used by investment banks. This allows us to analyze the accuracy of “real-world” valuation estimates. We show that underwriters rely on price-to-book and price-earnings multiples. The valuation estimates generated by these multiples are closest to offer prices. Conversely, when using enterprise value ratios comparable firms’ multiples are typically higher than those of the firms going public. We argue that underwriters have the possibility to select comparables that make their valuations look conservative.