How Do Underwriters Select Peers When Valuing IPOs?

Stefano Paleari, Andrea Signori and Silvio Vismara

Financial Management, 2014, vol. 43, issue 4, 731-755

Abstract: type="main">

Valuing initial public offerings (IPOs) using multiples allows underwriters discretion when selecting comparable firms. We find that they systematically exclude candidate comparable firms that make a given IPO appear overvalued. On average, comparable firms published in official prospectuses have 13%-38% higher valuation multiples than those obtained from matching algorithms or selected by sell-side analysts, including the same underwriter's analyst after the IPO. Even if IPOs are priced at a discount as compared to peers selected by the underwriters, they are still at a premium with regard to alternatively selected peers. Greater bias in the underwriter's selection of peers leads to poorer long run performance.

Date: 2014
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