How Do Investment Banks Value Initial Public Offerings (IPOs)?

Authors

  • Marc Deloof,

    1. The authors are respectively from University of Antwerp and Université catholique de Louvain; Erasmus University Rotterdam; and University College Ghent and Ghent University. They are grateful to an anonymous referee, An Buysschaert, Marc De Ceuster, Nancy Huyghebaert, Marc Jegers, Rez Kabir, Sophie Manigart and Ilse Verschueren for helpful comments and suggestions on an earlier draft of this paper. The usual disclaimer applies.
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  • Wouter De Maeseneire,

    1. The authors are respectively from University of Antwerp and Université catholique de Louvain; Erasmus University Rotterdam; and University College Ghent and Ghent University. They are grateful to an anonymous referee, An Buysschaert, Marc De Ceuster, Nancy Huyghebaert, Marc Jegers, Rez Kabir, Sophie Manigart and Ilse Verschueren for helpful comments and suggestions on an earlier draft of this paper. The usual disclaimer applies.
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  • Koen Inghelbrecht

    1. The authors are respectively from University of Antwerp and Université catholique de Louvain; Erasmus University Rotterdam; and University College Ghent and Ghent University. They are grateful to an anonymous referee, An Buysschaert, Marc De Ceuster, Nancy Huyghebaert, Marc Jegers, Rez Kabir, Sophie Manigart and Ilse Verschueren for helpful comments and suggestions on an earlier draft of this paper. The usual disclaimer applies.
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Address for correspondence: Marc Deloof, University of Antwerp, Prinsstraat 13, 2000 Antwerp, Belgium. e-mail: marc.deloof@ua.ac.be

Abstract

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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