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Determinants Of IPO Valuation

By Sanjai Bhagat and Srinivasan Rangan


We examine the valuation of financial variables, growth opportunities, insider retention and investment banker prestige for a sample of 1,655 IPOs from three time-periods: 1986-1990, January 1997 through March 2000 (designated as the boom period), and April 2000 through December 2001 (designated as the crash period). Once we control for IPO fundamentals (such as, income, sales, book equity, growth opportunities, insider retention, and investment banker prestige) and allow for different valuation of these fundamentals across different time-periods, average valuations of IPOs in the recent boom and crash periods were not statistically different from those of the late 1980s. We also document some shifts in the valuation of fundamentals across time-periods. Most interestingly, contrary to anecdotes in the financial press, income of IPO firms is weighted more when valuing IPOs in the boom period compared to the late eighties. With respect to inter-industry differences, we document that tech firms are valued less than nontech firms after controlling for IPO fundamentals. Interestingly, after we control for IPO fundamentals and allow for different valuation of these fundamentals for internet and noninternet IPOs, internet IPOs are not valued any differently than non-internet IPOs. Income and insider retention are valued more for tech firms. For internet firms, insider retention is valued more, but investment banker prestige, surprisingly, is valued less

Year: 2004
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