The Relevance of Reported Financial Information for Valuing European Internet IPOs

Abstract

The paper analyses the value relevance of financial information for explaining the value of European Internet companies that went public during the years 1998-2000. As measure for firm value we use the firm's market-to-book ratio that is in line with other research. The empirical results provide evidence that reported accounting information is relevant for explaining the IPO firm's market-to-book ratio. Sales are positively associated with the market-to-book ratio. The latter is consistent with Internet companies investing heavily in marketing to get marketplace acceptance and market share. The reported earnings are most of the time negative. We find a negative pricing of losses which is consistent with prior research; bigger losses increase, not reduce Internet companies' market values. Further, we document a 'hot market' for Internet IPOs. One of the six categories of analysed Internet firms, Content/Portals, appears statistically significant related to firm value. The empirical results remain qualitatively similar under various robustness checks.