Abstract
We empirically demonstrate that IPO firms that have reliable comparable firms with extensive analyst coverage are priced right at the offer. Those who invested in an IPO firm's shares at the offering price and those who invested in corresponding Comparable firm's shares would have earned the same return on average over the five years following the IPO date. The median offering price of an IPO was the same as its intrinsic value computed using the Residual Income Model that takes these differences into account; but higher than its intrinsic value based on the P/E multiple of its Comparable firm. The first day return on an IPO is positively related to the absolute value of the difference between its offer price and intrinsic value computed using publicly available information, a proxy for the valuation uncertainty associated with that IPO.
Published Version
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