The authors thank the Editors, an anonymous referee, Reena Aggarwal, Sangkyoo Kang, Ken Kim, Tammy Rogers, and session participants at the 2005 Southwestern Finance Association Annual Meeting for valuable comments and helpful discussions. The authors thank Patricia Peat for editorial help.
Assets in Place, Growth Opportunities, and IPO Returns
Article first published online: 27 OCT 2008
Volume 34, Issue 3, pages 65–88, September 2005
How to Cite
Chung, K. H., Li, M. and Yu, L. (2005), Assets in Place, Growth Opportunities, and IPO Returns. Financial Management, 34: 65–88. doi: 10.1111/j.1755-053X.2005.tb00110.x
- Issue published online: 27 OCT 2008
- Article first published online: 27 OCT 2008
We consider a simple model positing that initial public offering price is equal to the present value of an entity's assets in place and growth opportunities. The model predicts that initial return is positively related to both the size and risk of growth opportunities. Consistent with this prediction, we find initial return to be positively related to both the fraction of the offer price that is accounted for by the present value of growth opportunities and various proxies of issue uncertainty. We also find that IPO investors equate one dollar of growth opportunities to approximately three quarters of tangible assets.