IPO Valuation Research Articles

Green innovation and IPO return: Evidence from China

In this paper, we demonstrate a strong valuation effect of corporate green innovation on IPO valuation. Studying the Chinese listed companies, we find that the companies with green innovation, especially in the form of inventive patents, experience lower share underpricing (higher offering price) during the IPO process. The higher valuation of the IPO shares is driven by institutional investors who are willing to pay higher prices based on the information disclosure related to green innovation. This valuation effect is more pronounced for firms with less information accessible and firms with higher costs and legal risks related to environmental issues. Put together, green innovation is an important factor in increasing IPO value.

Valuation and underpricing of initial public offerings: The role of discretionary accounting accruals

This study examines the role of pre-IPO (pre-initial public offering) discretionary accruals in the valuation and underpricing of IPOs. We find that the underwriter offer price is unaffected while the market closing price is positively associated with the levels of pre-IPO discretionary accruals for issuers with aggressively reported earnings. We also find that this relative over-valuation of managed earnings by the markets explains a portion of the initial return that is not explained by other known determinants. For issuers with conservatively reported pre-IPO earnings, there is no relation between discretionary accruals and the offer price or the market price, and the discretionary accruals do not explain any IPO underpricing. Our subsequent analysis shows that lower stock retention is a screen and a signal of entrepreneurs’ credibility to the markets. There seems to be a higher degree of earnings scrutiny by both the markets and the underwriters for IPOs with low insider retention. However, markets tend to assign a higher weight to aggressively reported earnings of issuers with higher insider retention, presumably because of perceived incentive alignment. Underwriters, with relatively lesser information asymmetry than the markets, tend to see through the distortions caused by earnings manipulations in the valuation of IPOs, regardless of the levels of issuers’ stock retention.

Reported risk categories in the prospectus and IPO valuation in Indian stock market: an empirical investigation

Reported risk categories in the prospectus and IPO valuation in Indian stock market: an empirical investigation

Reported risk categories in the prospectus and IPO valuation in Indian stock market: an empirical investigation

Reported risk categories in the prospectus and IPO valuation in Indian stock market: an empirical investigation

Scalability, venture capital availability, and unicorns: Evidence from the valuation and timing of IPOs

The growing phenomenon of highly valued startups (e.g., unicorns) poses fundamental questions for entrepreneurship research. We posit that venture scalability and VC funding availability may explain startups' IPO valuations (and timing). Highly scalable ventures may not only capture very large market opportunities, but their scaling strategies may also be constrained by the governance and regulatory burdens faced by public firms. Accordingly, we hypothesize and find that more scalable ventures undertake IPOs at higher valuations, which is positively moderated by VC funding availability. Highly scalable startups also delay their IPOs for longer but only when VC funding availability is high.

Do retail and institutional investors react differently to earnings management? Evidence from Indian IPOs

PurposeThis study investigates the impact of pre-IPO earnings management on investor demand in the Indian IPO market. It also examines whether earnings management by issuer firms affects IPO valuation, a topic that is underexplored in accounting research.Design/methodology/approachThe study uses the data of 310 IPOs from India during the period 2000–2021. The association between pre-IPO earnings management with investor demand and valuation is tested using cross-sectional ordinary least squares regression models with heteroscedasticity-robust standard errors.FindingsThe study finds that the degree of pre-IPO earnings management impacts retail investor demand, measured as their over-subscription multiple. Pre-IPO earnings management is unrelated to institutional investor bidding. Further, this paper suggests no relation between pre-IPO earnings management and IPO valuation.Research limitations/implicationsFuture studies could explore various other forms of earnings management and their impact on investor demand and valuation.Practical implicationsThe findings of this study will help the investors and regulators to understand the practice of earnings management among IPO firms and how it is related to IPO demand and valuation.Originality/valueThis study contributes to the existing literature on IPO-earnings management and investor demand by documenting that issuer firms engage in earnings management to influence investor demand, particularly retail investor demand. Analysis of IPO valuation reveals that earnings management is mostly unrelated to IPO valuation, contrary to the general perception in the literature.

From “Super App” to “Super VC”: The value-added effect of China's digital platforms

This paper studies China's big digital platforms’ value-added effect as venture capitalists, using a dataset of companies registered in China that eventually reach the initial public offering stage. We find that China's digital platforms’ investments positively affect their portfolio firms’ IPO performance, in terms of higher IPO valuation, lower underpricing, and shorter time to reach the IPO stage, which is inconsistent with the grandstanding hypothesis. The plausible underlying channels are the certification and monitoring roles played by China's digital platform. The results remain robust after addressing several concerns. Our study sheds new light on VCs’ characteristics and digital platforms’ activities.

IPO valuation in an emerging market – a study in Iran

PurposeThis study aims to highlight the accuracy, performance and selection of the IPO valuation methods in the Islamic Republic of Iran’s emerging market.Design/methodology/approachThe authors performed accurate ex ante evaluations based on a pre-IPO data set obtained from valuation institutions. This study considered valuation methods through correlations, Mann–Whitney U tests and regression analysis, using a sample of 83 IPOs from January 2017 to March 2021.FindingsThe authors found that the dividend discount model (DDM) was the most popular in Iran. Even after controlling firm characteristics and market circumstances, the IPO price was highly correlated to pre-IPO reports’ estimates. The results showed that firms’ age, size and profitability affected the selection of valuation methods. The valuers did not apply forward P/E in a volatile market. Firm size affected the weights assigned to free cash flow to the firm, and the valuers considered the asset-in-place intensity to determine the weights of DDM, P/E and net asset value, and they mainly used the P/E to value old firms. Finally, this study estimated the accuracy of the pre-IPO report at 61% and found the highest accuracy to be associated with DDM.Originality/valueIPO pricing in emerging markets constitutes a more significant dilemma than in developed markets. This paper provides empirical evidence of IPO pricing focusing on valuation methods used in the context of an emerging market – the Islamic Republic of Iran.

The role of corporate venture capitalists in supporting the growth of their backed start-ups

PurposeBuilding on the venture capital (VC) literature, this paper aims to study the impact of the value added by corporate venture capitalists (CVCs) on their funded companies by comparing its IPO valuation with its independent venture capitalists (IVCs) peers.Design/methodology/approachThis study uses a sample of 3,719 VC-backed ventures, between the years 1998 and 2020. The empirical analysis focuses on the propensity score matching approach, pairing ventures based on their probability of being funded by CVCs, and consequently, interpret the results derived from the valuation multiple ratios between the “nearest neighbors.”FindingsThis study finds that companies funded by CVCs can achieve higher valuations at their IPO compared to IVC-backed companies. Moreover, CVC-backed companies outperformance is mainly driven by startups which hold a technological fit with their CVC investor, with higher technological overlaps being translated into more significant valuations.Research limitations/implicationsThis study presents systematic evidence to the subject concerning ventures’ type of investors and its effect on the startups’ IPO valuations.Practical implicationsThis paper contributes to the enrichment of the industry’s literacy while also easing entrepreneurs’ decisions when choosing a funding partner. CVCs offer a variety of services and support that fits the specific needs of their funded companies.Originality/valueTo the best of the authors’ knowledge, this study is among the first to examine the role of CVCs as a tool to help venture growth.

The Role of Beauty Premium in IPO Valuations and Market Efficiency

The Role of Beauty Premium in IPO Valuations and Market Efficiency

Impact of serial entrepreneurs on IPO valuation: Evidence from U.S. IPOs

We investigate the implications for serial entrepreneurs in terms of IPO valuation. Using the sample of 2017 firms that went public in U.S. between 1998 and 2017, our findings show that the positive impact of board members’ entrepreneurial track record on the valuation of IPO is more salient in young and mid-age firms. Moreover, small and medium-sized businesses benefit more from entrepreneurial expertise than large corporations. Finally, the relation between an established track record and IPO valuation is more significant for firms with venture capital backing.

Innovations in IPO Deal Structure: Do Up-C IPOs Harm Public Shareholders?

This paper examines an innovation in capital formation that has spurred contentious debate: the Umbrella Partnership Corporation (“Up-C”) IPO. Advisors and underwriters argue that the Up-C deal structure is a driver of post-IPO value and, thus, is a value-enhancing means of raising capital that may be one solution to concerns regarding the drop in the number of publicly traded companies. Consistent with these claims, recent research suggests that organizing soon-to-be public businesses as pass-through entities (as is the case for Up-Cs) leads to superior future performance. Yet, broadening the analysis to consider abnormal stock performance and post-IPO litigation of a larger and more recent sample of exclusively Up-C IPOs, we conclude just the opposite. While the Up-C deal structure increases IPO valuations and predicts positive post-IPO operating performance, the return performance of Up-C IPOs indicates that Up-C deals harm public shareholders. Further, despite their superior earnings performance, Up-C IPOs face a significantly higher rate of post-IPO litigation as compared with non-Up-C IPOs. Because IPO investors seemingly do not anticipate the myriad ways in which the Up-C deal structure might facilitate opportunism by pre-IPO owners, they frequently turn to litigation as an ex-post settling-up mechanism. Consequently, our paper offers the first empirical evidence of downsides associated with the Up-C deal structure for public shareholders and, in so doing, affords the rarity of having academic evidence lead (as opposed to respond to) a controversial debate. This paper was This paper was accepted by Victoria Ivashina, finance. Funding: The authors gratefully acknowledge the financial support of the NYU Stern School of Business, the J. Reuben Clark Law School, and the Marriott School of Business. Supplemental Material: Data are available at https://doi.org/10.1287/mnsc.2022.4454 .

Assessing value of a digital company: Uber’s IPO 2019

Theoretical basis Via this case, students are introduced to several alternative methods of valuation, including the valuation based on the “real options” theory. The novelty of the case is the link between valuation and the type of innovation that the company represents. The suggested valuation frameworks, which include both quantitative and qualitative assessments, are applicable not only in the context of an IPO valuation but also in the context of any kind of M&A activity. Research methodology This case was prepared mostly via secondary research. All the information about Uber and the industry was collected via publicly available sources. No internal documents of the company were used in the preparation of this case. The primary research consisted of an interview with the protagonist Catherine (whose name is disguised). Other disguised elements in the case include the name of the Value Investor conference organizer (Spyros Spyrou, not his real name), the country of the Value Investor conference (omitted) and the conference venue (Princess hotel, not any actual venue). Case overview/synopsis In 2019, Uber, the famous ride-sharing company, made waves in financial markets as the most controversial IPO valuation. With a wide range of proposed values, Uber puzzled investors, once again living up to its fame of a rebel and a disruptor. When Uber finally went public in May 2019, its IPO valuation stood at $82.4bn. The heated discussion in the media continued even after the IPO: “Is Uber worth this amount? Is there an upside potential for the investors who bought shares at the IPO price? What if this is a hype and markets are simply embracing higher valuations?” Complexity academic level This case can be used at the undergraduate, graduate (MBA) or executive level in finance-related courses such as Company Valuation or Valuing Innovation, which cover the topic of valuation and specifically the topic of valuing innovative companies.

Legal Perception and IPOs: An Investigation into the Impact of Legal Signaling on Firm Valuation

In this paper, we contribute to the literature on institutional determinants of IPO valuation. We introduce the concept of “legal signaling,” which focuses on the perception of law and thus complements the existing institutional approaches to IPO valuation which consider the quality of the positive law (“standard view”) and firm-level corporate governance practices (“firm signaling view”). Our approach explicitly models the difference between the effect of the positive law and the effect of the perception of law on IPO value. Based on a world-wide longitudinal dataset of IPO performance across a large number of countries, we find strong support for the claim that the perception of quality of law, operationalized as a country’s legal shareholder protection, is more important than its actual quality to explain post-IPO firm value. We also uncover that the effect of perception on IPO value is stronger when the law’s quality is correctly perceived than when it is misperceived. Overall, our findings underscore the need for a more sophisticated theorization of the ways in which law affects entrepreneurial finance.

Finance Impact of corporate governance on the valuation of IPOs in Pakistan stock exchange listed Firms. A moderating role of the family Ownership.

The objective of our study is to investigate the impact of the corporate governance on the IPO performance with moderating impact of the family ownership. To investigate that relationship, we used the data of IPOs registered from 2008 to 2017 in Pakistan Stock exchange. We used the OLS methods to analysis of the data. Our findings shows that Board independence (BIND) has positive significant relationship with IPO return, it means that independent directors have the more technical knowledge and experience in maintaining the IPO return and making the strong policy for the organizations. CEO duality has the significant negative relationship with IPO return with (P=0.0833), it means that when CEO has the combine rule then decisions are not distributed, and monopoly existed in decisions that leads to the negative impact on the IPO performance. Board diligence, Board size, ownership concentration and gender diversity have no impact are being seen in our analysis. In the moderating effect of the family ownership in reference to board diligence (BD) the results changed to significant positive relationship, it means that with the family-owned firms when board meetings increased then increased in the IPO return due to some factors. With the moderation of the family ownership the results of the Board independence also improved that shows the role of the family-owned firm in between them. Women in the board that means the gender diversity has no impact but with the moderating effect of the family ownership women in the board has significant positive impact. This study is helpful for the financial managers, investors, and the finance students and also for the government, in maintaining the code of the corporate governance.

Legal Perception and Finance: The Case of IPO Firm Value

AbstractIn this paper, we contribute to the literature on institutional determinants of IPO valuation. We introduce the concept of ‘legal signalling’, which focuses on the perception of the quality of law and thus complements the existing institutional approaches to IPO valuation which consider the quality of the positive law (‘standard view’) and firm‐level corporate governance practices (‘firm signalling view’). Our approach explicitly models the difference between the effect of the positive law and the effect of the perception of law on IPO value. Based on a worldwide longitudinal dataset of IPO performance across a large number of countries, we find strong support for the claim that the perception of the quality of law is more important than its actual quality to explain post‐IPO firm value. This effect holds regardless of whether the law's quality is correctly perceived or misperceived. Overall, our findings underscore the need for a more sophisticated theorization of the ways in which law affects entrepreneurial finance.

Legal Perception and Finance: The Case of IPO Firm Value

In this paper, we contribute to the literature on institutional determinants of IPO valuation. We introduce the concept of ‘legal signaling,’ which focuses on the perception of the quality of law and thus complements the existing institutional approaches to IPO valuation which consider the quality of the positive law (‘standard view’) and firm-level corporate governance practices (‘firm signaling view’). Our approach explicitly models the difference between the effect of the positive law and the effect of the perception of law on IPO value. Based on a worldwide longitudinal dataset of IPO performance across a large number of countries, we find strong support for the claim that the perception of the quality of law is more important than its actual quality to explain post-IPO firm value. This effect holds regardless of whether the law’s quality is correctly perceived or misperceived. Overall, our findings underscore the need for a more sophisticated theorization of the ways in which law affects entrepreneurial finance.

Trademarks in Entrepreneurial Firm Success: Empirical Evidence from Venture Backed Private Firms and Initial Public Offerings

We analyze the role of trademarks in entrepreneurial finance, hypothesizing that trademarks play two important roles: a protective role, leading to better product market performance; and an informational role, signaling higher firm quality to investors. We develop testable hypotheses relating the trademarks held by private firms to characteristics of venture capital (VC) investment in them, their probability of successful exit, IPO and secondary market valuations, institutional investor IPO participation, post-IPO operating performance, and post-IPO information asymmetry. We test these hypotheses using a large and unique dataset of trademarks held by VC-backed private firms and present causal evidence supporting them.

Pension funds and IPO pricing. Evidence from a quasi-experiment

We exploit a quasi-experiment arising from the government-forced changes to the assets under management and investment policy of the Polish pension funds. We test whether this new regulation and its resultant demand shock on the investors' side, leads to changes in the IPO pricing and the subsequent stock's performance. We report material and a statistically significant decrease in the IPO proceeds (IPO size) in the post-treatment period equal to over 107 million PLN (34 million USD). We find no empirical evidence that the treatment had a significant effect on the first-day IPO underpricing or on the long-term underperformance. We conclude that the demand shock resulting from the pension system reform that primarily aimed at solving fiscal problems effectively eliminated the so-called ‘pension premium’ of higher IPO valuations. Thus, it indirectly impaired companies' power of raising money in the public stock market. Furthermore, we report a decrease in the average first-day IPO returns among big issuers that is consistent with the book building literature.

Signal sequences: Venture Capital, IPO and Startup Valuation at Acquisitions

Signal sequences: Venture Capital, IPO and Startup Valuation at Acquisitions