Abstract
We examine the pricing of initial public offering (IPO) and seasoned equity offering (SEO) firms using a stochastic frontier methodology. The stochastic frontier framework models the difference between the maximum possible value of the firm and its actual market capitalization at the time of the offering as a function of observable firm characteristics. Using a new data set, we find that commonly used pricing factors do indeed influence valuation. Ceteris paribus, firms in industries with great earnings potential are more highly valued, and IPO firms are underpriced. Theories regarding underwriter reputation or windows of opportunity for equity issuance are not supported in our empirical results.
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