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Assets in Place, Growth Opportunities, and IPO Returns
Author(s) -
Chung Kee H.,
Li Mingsheng,
Yu Linda
Publication year - 2005
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2005.tb00110.x
Subject(s) - initial public offering , liberian dollar , economics , value (mathematics) , monetary economics , return on assets , financial economics , excess return , assets under management , business , finance , fixed asset , microeconomics , stock exchange , production (economics) , paleontology , context (archaeology) , machine learning , computer science , biology
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.