Are IPOs Really Underpriced or Overpriced: Evidence from Tehran Stock Exchange

Abstract

While it is well documented in the literature that IPOs have been consistently underpriced on average of 15% or more over the past three decades all over the world, the recent seminal study by Purnanandam and Swaminathan (2004) report that IPOs are overvalued at the offer price relative to value metrics based on industry peer price multiples. Current study, applying residual income valuation (RIV) model along with comparable firm multiples valuation approach, replicates and expands upon the research by Purnanandam and Swaminathan (2004) by providing evidence from a sample of 162 IPOs floated during 1997-2009 in the Tehran Stock Exchange. The results suggest that: First, Iranian IPOs are underpriced on initial trading window of one month following issue on average of 13.93%. On the long-run performance, the average market-adjusted CARs and BHARs over three years after continuously listing are -6.67 and 0.00 percent, respectively. As a key finding of this study, the valuation results reveals that the sample Iranian IPOs are significantly overvalued compared to peer firms selected on industry and size, and also relative to their intrinsic value derived from the RIV model. This result is inconsistent with the traditional view (mainly asymmetric information based explanations) that IPOs are underpriced at offer price and fairly valued in the aftermarket relative to their matched comparable seasoned firms. However, this finding yields strong support for the investors' sentiment and fads and/or over-optimism argument in the literature.