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How Do Investment Banks Value Initial Public Offerings (IPOs)?
Author(s) -
Deloof Marc,
De Maeseneire Wouter,
Inghelbrecht Koen
Publication year - 2009
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2008.02117.x
Subject(s) - initial public offering , valuation (finance) , earnings , cash flow , business , intrinsic value (animal ethics) , discounted cash flow , investment banking , free cash flow , value (mathematics) , cash , terminal value , monetary economics , economics , financial economics , finance , operating cash flow , mathematics , statistics , philosophy , environmental ethics
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.