Comparable firm’s P/E multiple and IPO valuation: an empirical investigation for Indian IPOs
Tóm tắt
We examine the influence of the comparable P/E (selected on different parameters, i.e., industry, revenue characteristics, book value, and return on net worth) on IPO pricing. The sample comprises of 120 IPOs issued in India during the period 2002–2007. We find that the comparable P/E chosen on the basis of industry alone shows poor estimation power. However, significant improvement in the estimation power of the comparable P/E approach is observed while tapering down the list of comparable firms from the identical industry (affiliating IPO firm) on the basis of revenue characteristics, book value, and return on net worth. We suggest that comparable firms selected from identical industry further adjusted with revenue characteristics and return on net worth provide the most efficient P/E multiple for evaluating IPO price. This paper also finds that IPO price estimated by multiplying current EPS of the IPO firm with benchmark peer group average P/E is positively associated with both offer price and list price, suggesting that higher value can be expected for IPOs relating to high-valued peer group and vice versa. Valuations tend to be more accurate (adjusted R
2 = 77.5 %), when the price is estimated on the basis of comparable peer group P/E along with a set of financial information. The offer price and list price are found positively and significantly influenced by the financial information, i.e., book value, growth and risk along with peer group P/E.
Tài liệu tham khảo
Aggarwal R, Bhagat S, Rangan S, (2009) The impact of fundamentals on IPO valuation. Financ Manage (Blackwell Publishing Limited).38(2):253–284
Alford A (1992) The effect of the set of comparable firms on the accuracy of the price-earnings valuation method. J Account Res 30:94–108
Ali A, Zarowin P (1992) The role of eamings levels in annual eamings-returns studies. J Account Res 30:286–296
Baker M, Ruback RS (1999) Estimating industry multiples. Working paper, Harvard University
Bali GT, Demirtas KO, Hovakimian A, Merrick J (2006) Peer pressure: industry group impacts on stock valuation precision and contrarian strategy performance. J Portf Manage 32(3):80–92
Barker RG (1999) Survey and market-based evidence of industry-dependence in analysts’ preferences between the dividend yield and price-earnings ratio valuation models. J Bus Account 26:393–418
Barniv R, Myring M (2006) An international analysis of historical and forecast earnings in accounting-based valuation models. J Bus Financ Account 33(7 & 8):1087–1109
Barth M, Clinch G (1998) Revalued financial, tangible, and intangible assets: associations with share prices and non-market-based value estimates. J Account Res 36:199–233
Bartov E, Mohanram P, Seethamraju C (2002) Valuation of internet stocks: an IPO perspective. J Account Res 40:321–346
Beatty R, Ritter J (1986) Investment banking, reputation, and the underpricing of initial public offerings. J Financ Econ 15(1/2):213–232
Beatty R, Riffe S, Thompson R (2000) IPO pricing with accounting information. Southern Methodist University Working Paper
Beaver W, Morse D (1978) What determines price-earnings ratios? Financ Anal J 34(4):65–76
Bhagat S, Rangan S (2004) Determinants of IPO valuation. available at SSRN: http://ssrn.com/abstract=479541 or doi:10.2139/ssrn.479541 last Accessed on 12 Feb 2009
Bhojraj S, Lee C (2002) Who is my peer? A valuation based approach to the selection of comparable firms. J Account Res 40:407–439
Boatsman J, Baskin E (1981) Asset valuation with incomplete markets. Account Rev 56:38–53
Bradshaw MT (2002) The use of target prices to justify sell-side analysts’ stock recommendations. Account Horizons 16:27–41
Burgstahler DC, Dichev ID (1997) Earnings, adaptation and equity value. Account Rev 72(2):187–215
Carter RB, Van Auken HE (1990) Security analysis and portfolio management: a survey and analysis. J Portf Manage 16(3):81–85
Carter Richard B, Dark Frederick H, Singh Ajay K (1998) Underwriter reputation, initial returns, and the long-run performance of IPO stocks. J Financ 53(4):285–311
Chang K, Tang Y (2007) Pricing Taiwan’s initial public offerings, Asia-Pacific. J Account Econ 14:69–84
Charitou A, Clubb C, Andreou A (2000) The value relevance of earnings and cash flows: empirical evidence for Japan. J Int Financ Manage Account 11(1):1–22
Collins D, Kothari SP (1989) An analysis of inter temporal and cross sectional determinants of ERCs. J Account Econ 11:143–183
Collins DW, Pincus M, Xie H (1999) Equity valuation and negative earnings: the role of book value of equity. Account Rev 74(1):29–61
Cotter J, Goyen M, Hegarty S (2005) Offer pricing in Australian industrial public offers. Account Financ 45:95–125
Cragg JG, Malkiel BG (1982) Experience and structure of share prices. Chicago University of Chicago press, Chicago
Damodaran A (2006) Damodaran on valuation. 2nd edn. Wiley, Hoboken, NJ. Manuscript provided by the author, http://www.damodaran.com. Accessed on 04 Apr 2009
Davis-Friday PY, Gordon EA (2005) Relative valuation roles of equity book value, net income, and cash flows during a macroeconomic shock: the case of Mexico and the 1994 currency crisis. J Int Account Res 4(1):1–21 AN 17001640
Demirakos EG, Strong NC, Walker M (2004) What valuation models do analysts use? Account Horizons 18:221–240
Dielman TE (2007) Applied regression analysis. Duxbury Applied Series, Thompson Learning, and ISBN: 81-315-0326-7
Eberhart AC (2001) Comparable firms and the precision of equity valuations. J Bank Finance 25:1367–1400
Firth M, Li Y, Wang SS (2008) Valuing IPOs using price-earnings multiples disclosed by IPO firms in an emerging capital market. Rev Pac Basin Financ Mark Policies 11(3):429–463
Foster G (1986) Financial statement analysis. Prentice-Hall, New York
Geddess R (2003) IPOs and equity offerings. 1st edn. Butterworth-Heinemann, an imprint of Elsevier, ISBN: 0750655380
Gilson SC, Hotchkiss ES, Ruback RS (2000) Valuation of bankrupt firms. Rev Financ Stud 13:43–74
Gupta LC, Jain PK, Gupta CP (1998) Indian stock market P/E ratios. Soc Cap Mark Res Dev. ISBN: 81-900513-5-0
Herrmann V, Richter F (2003) Pricing with performance-controlled multiples. Schmalenbach Bus Rev 55(3):194–219
How JC, Lam J, Yeo J (2002) Valuing IPOs in the Australian Capital Market, Working paper. Curtin University of Technology, Perth and University of Melbourne, Parkville
Kantor J, Pike R (1987) The determinants of the value of unlisted shares: opinions of professional valuers in Canada. Account Bus Res 17(66):109–115, 7 (AN 14156534)
Kim M, Ritter J (1999) Valuing IPOs. J Financ Econ 53:409–437
Kim J, Krinsky I, Lee J (1995) The role of financial variables in the pricing of Korean initial public offerings. Pac Basin Financ J 3(4):449–464
Klein A (1996) The association between the information contained in the prospectus and the price of initial public offerings. J Financ Statement Anal 2:23–40
Krinsky I, Rotenberg W (1989) The valuation of initial public offerings. Contemp Account Res 5(2):501–515
Leclair MS (1990) Valuing closely held corporation: the validity and performance of established valuation procedures. Account Horizons 4:31–42
Lie E, Lie HJ (2002) Multiples used to estimate corporate value. Financ Anal J 58:44–54
Liu J, Nissim D, Thomas J (2002b) International equity valuation using multiples. Working Paper, Columbia University
Lokey OK, Braun RS, Cefali SL (1990) Business valuations. In: Frank PB, Wagner MJ, Weil RL (eds) Litigation services handbook: the role of the accountant as expert witness. Wiley, New York
Loughran T, Ritter JR (1995) The new issues puzzle. J Financ 50:23–51
McGuinness P (1993) The market valuation of initial public offerings in Hong Kong. Appl Financ Econ 3:267–281
Ohlson JA (1995) Earnings, book values, and dividends in equity valuation. Contemp Account Res 11:661–687
Papadogonas TA (2007) The financial performance of large and small firms: evidence from Greece. Int J Financ Serv Manage 2(1–2):14–20
Penman SH (1996) The articulation of price-earnings ratios and market-to-book ratios and the evaluation of growth. J Account Res 34:235–259
Purnanandam AK, Swaminathan B (2002) Are IPOs underpriced? Working paper (Cornell University)
Ritter JR (1984) Signaling and the valuation of unseasoned new issues: a comment. J Financ 39:1231–1237
Roosenboom P (2007) How do underwriters value initial public offerings? An empirical analysis of the french IPO market. Contemp Account Res 24(4):1217–1243
Ross SA (1977) The determination of financial structure: the incentive-signaling approach. Bell J Econ 8:23–40
Sarkar J, Sarkar S (2005) Debt and corporate governance in emerging economies: evidence from India, Working Paper No. 2005-007, Indira Gandhi Institute of Development Research
Schreiner A (2007) Equity valuation using multiples: an empirical investigation, vol XXV. Academic Network, Roland Berger Strategy Consultants, DUV Gabler Edition Wissenschaff, Wiesbaden, p 170
Sherman AJ (2003) What’s your company’s wealth? Parting Company, Chapter 2, pp 15–13 (AN 9442296)
Tasker SC (1998) Industry-preferred multiples in acquisition valuation. Working paper, Cornell University
Wilcox JW (1984) The P/B-ROE valuation model. Financ Anal J 40(1):58–66
Yeh Y-H, Shu P-G, Guo R-J (2008) Ownership structure and IPO Valuation—Evidence from Taiwan. Financ Manage 141–161
Yu T, Tse YK (2006) An empirical examination of IPO under pricing in Chinese A—Share market. China Econ China Econ Rev 17(4):363–382